Polytechnic University of the Philippines

College of Business Administration

Department of Marketing Management
Sta. Mesa, Manila

COMPENSATION AND
INCENTIVES

Cabanban, Anchelle

Cadiao, Estelle Joyce

Carpizo, Alexandra

Fernandez, Angelica

Gawat, Ma. Crislyn

Lapuz, Anne Victoria

Panlilio, Erica Joy

Plantig, Bien Huxley

Sanguyo, Ellaine Joy

Compensation

Compensation is a term closely related to the labour market. When the supply of
labours is short in the market, better compensation can fulfil such shortage. It contains
both direct and indirect components. Compensation refers to the remuneration that a
worker gets from his/her employer in exchange for the work and contribution made to
the organization. Compensation is a tool used by management for a variety of purposes
to further the existance of the company. Compensation may be adjusted according the
the business needs, goals, and available resources.

Compensation may be used to:

 recruit and retain qualified employees.

 increase or maintain morale/satisfaction.
 reward and encourage peak performance.
 achieve internal and external equity.
 reduce turnover and encourage company loyalty.
 modify (through negotiations) practices of unions.

Different types of compensation include:

 Base Pay
 Commissions
 Overtime Pay
 Bonuses, Profit Sharing, Merit Pay
 Stock Options
 Travel/Meal/Housing Allowance
 Benefits including: dental, insurance, medical, vacation, leaves, retirement,
taxes.
Compensation Plans
Develop a program outline.

o Set an objective for the program.

o Establish target dates for implementation and completion.
o Determine a budget.

Designate an individual to oversee designing the compensation program.

o Determine whether this position will be permanent or temporary.

o Determine who will oversee the program once it is established.
o Determine the cost of going outside versus looking inside.
o Determine the cost of a consultant's review.

Develop a compensation philosophy.

o Form a compensation committee (presumably consisting of officers or at least

including one officer of the company).
o Decide what, if any, differences should exist in pay structures for executives,
professional employees, sales employees, and so on (e.g., hourly versus
salaried rates, incentive-based versus noncontingent pay).
o Determine whether the company should set salaries at, above, or below market.
o Decide the extent to which employee benefits should replace or supplement cash
compensation.

Conduct a job analysis of all positions.

o Conduct a general task analysis by major departments. What tasks must be

accomplished by whom?
o Get input from senior vice presidents of marketing, finance, sales, administration,
production, and other appropriate departments to determine the organizational
structure and primary functions of each.
o Interview department managers and key employees, as necessary, to determine
their specific job functions.
 o Decide which job classifications should be exempt and which should be
nonexempt.
o Develop model job descriptions for exempt and nonexempt positions and
distribute the models to incumbents for review and comment; adjust job
descriptions if necessary.
o Develop a final draft of job descriptions.
o Meet with department managers, as necessary, to review job descriptions.
o Finalize and document all job descriptions.

Evaluate jobs.

o Rank the jobs within each senior vice president's and manager's department, and
then rank jobs between and among departments.
o Verify ranking by comparing it to industry market data concerning the ranking,
and adjust if necessary.
o Prepare a matrix organizational review.
o On the basis of required tasks and forecasted business plans, develop a matrix
of jobs crossing lines and departments.
o Compare the matrix with data from both the company structure and the
industrywide market.
o Prepare flow charts of all ranks for each department for ease of interpretation
and assessment.
o Present data and charts to the compensation committee for review and
adjustment.

Determine grades.

o Establish the number of levels - senior, junior, intermediate, and beginner - for
each job family and assign a grade to each level.
o Determine the number of pay grades, or monetary range of a position at a
particular level, within each department.

Establish grade pricing and salary range.

 o Establish benchmark (key) jobs.
o Review the market price of benchmark jobs within the industry.
o Establish a trend line in accordance with company philosophy (i.e., where the
company wants to be in relation to salary ranges in the industry).

Determine an appropriate salary structure.

o Determine the difference between each salary step.

o Determine a minimum and a maximum percent spread.
o Slot the remaining jobs.
o Review job descriptions.
o Verify the purpose, necessity, or other reasons for maintaining a position.
o Meet with the compensation committee for review, adjustments, and approval.

Develop a salary administration policy.

o Develop and document the general company policy.

o Develop and document specific policies for selected groups.
o Develop and document a strategy for merit raises and other pay increases, such
as cost-of-living adjustments, bonuses, annual reviews, and promotions.
o Develop and document procedures to justify the policy (e.g., performance
appraisal forms, a merit raise schedule).
o Meet with the compensation committee for review, adjustments, and approval.

Obtain top executives' approval of the basic salary program.

o Develop and present cost impact studies that project the expense of bringing the
present staff up to the proposed levels.
o Present data to the compensation committee for review, adjustment, and
approval.
o Present data to the executive operating committee (senior managers and
officers) for review and approval.

Communicate the final program to employees and managers.

 o Present the plan to the compensation committee for feedback, adjustments,
review, and approval.
o Make a presentation to executive staff managers for approval or change, and
incorporate necessary changes.
o Develop a plan for communicating the new program to employees, using slide
shows or movies, literature, handouts, etc.
o Make presentations to managers and employees. Implement the program.
o Design and develop detailed systems, procedures, and forms.
o Work with HR information systems staff to establish effective implementation
procedures, to develop appropriate data input forms, and to create effective
monitoring reports for senior managers.
o Have the necessary forms printed.
o Develop and determine format specifications for all reports.
o Execute test runs on the human resources information system.
o Execute the program.

Monitor the program.

o Monitor feedback from managers.

o Make changes where necessary.
o Find flaws or problems in the program and adjust or modify where necessary.

Incentives

An incentive is an object, item of value or desired action or event that spurs an

employee to do more of whatever was encouraged by the employer through the chosen
incentive. You want to manage your incentives in such a way that you do not create
entitled employees. You also do not want to demotivate employees.

Four kinds of incentives are available for employers to use at work. Others might
categorize these incentives differently, but these four categories work for most
situations.
  Compensation incentives may include items such as raises, bonuses, profit
sharing, signing bonus, and stock options.
 Recognition incentives include actions such as thanking employees, praising
employees, presenting employees with a certificate of achievement, or
announcing an accomplishment at a company meeting. Employers can offer
recognition incentives as part of an overall company employee recognition
program. They can also offer employee recognition in the day-to-day interaction
of managers with employees. A personal note of praise from the manager is an
employee favorite incentive.
 Rewards incentives include items such as gifts, monetary rewards, service
award presents, and items such as gift certificates. An additional example
is employee referral awards that some companies use to encourage employees
to refer job candidates. These incentives are often awarded in conjunction with
recognition incentives to send a positive message to employees about what
contributions and behavior the employer wishes to see

 Appreciation incentives include such happenings as company parties and

celebrations, company-paid family activity events, ice cream socials, birthday
celebrations, sporting events, paid group lunches, and sponsored sports teams.
An example is a product development team that meets the goals of its first phase
of a product project and orders in pizza for the team celebration.

How Do Employers Use Incentives?

Employers use incentives to promote a particular behavior or performance that they

believe is necessary for the organization’s success. For example, a software company
provides employee lunches on Fridays to promote teamwork across departments and
functional areas.

The lunches are also an excellent opportunity to brief employees on company progress
outside of their assigned areas. They also use the lunches to provide necessary
information to employees or for employees to present to their coworkers on hobbies and
interests—all of which contribute to staff members knowing each other better.

They are used for reasons such as to:

 Increase productivity
 Retain employees
 Attract and reward high achievers
 Thank employees for reaching and exceeding goals
 Encourage teamwork

How to Provide Incentives

Reward and recognition activities that are transparent work to build trust with
employees. If criteria or the recognition process are secret, if they appear to only
recognize pet employees, or if they are arbitrary, you risk alienating and demoralizing
employees.

Consequently, for successful use of incentives, employers need to:

 Make sure that all employees understand the objectives the employer has in
offering incentives.

 Ensure that the criteria for obtaining the incentives are clearly spelled out.
 Communicate the specific criteria to all employees. Provide examples so that
employees understand what you are seeking and share your picture of success
 State the timeline and allow a certain amount of time for employees to
accomplish the actions that you'd like to see when you communicate the
incentives criteria.
 Reward every employee who achieves the expectations.
 Tell the employees exactly why their contribution made them eligible to receive
the incentive.
  You can magnify the power of the incentives you provide by writing a letterto the
employee that provides thanks to him or her for their contribution. You can also
announce all of the recipients of the incentive at a company meeting and
personally thank each recipient.

Importance of Good Compensation and Incentive Plans

Compensation covers everything an employer offers an employee in return for

their work. Although the term is commonly associated with money, employee
compensation also includes nonmonetary benefits, such as health insurance and a
pension plan. Employee compensation often plays a significant role in different areas of
the workplace and may affect everything from turnover rate to workers' morale.

Attracting Top Talent

People are always looking to put themselves in the best possible position
financially. Those who are worth a specific salary amount often know their value and will
seek a position that pays accordingly. Do research on what your competitor's
compensation and benefits packages look like. Make sure you offer a similar package to
your potential employees so that you attract the best candidates for your company.
Hiring the right candidate the first time reduces recruiting costs and helps free up
business owners for other tasks.

Increased Motivation

Properly compensating employees shows you value them as workers and as

human beings. When people feel valued, they feel better about coming in to work.
Overall company morale increases and people are motivated to come to work and do a
good job. Additionally, when employees know there are bonuses or commissions, they
are increasingly motivated to deliver grander results. Bonus and commission
compensation plans become a focal point for success.
Employee Loyalty

When employees are being paid well and are happy, they're likely to stay with the
company. Proper compensation is one factor why employees remain with employers.
Loyalty means that business owners don't need to continue to spend time, money and
energy on recruiting new candidates. Employee retention and low-turnover rates are
great for employers who cultivate a team that knows what to do. That team is also
motivated to be part of the team, and they get the job done well.

Increased Productivity

Happy employees are productive employees. Productivity in relation to

compensation starts with employees feeling valued which increases motivation and
loyalty. Not only are employees more motivated to do a good job, but also, the longer
people are with the company, the more they know and the more efficient they become.
All of this leads to increased productivity.

Job Satisfaction

Creating the right compensation plan leads to stronger job satisfaction. The right
compensation plan includes benefits, along with all the other bonuses available.
Employees often boast about holiday bonuses or they keenly watch how the company
stock performs because they have stock options. The right compensation program
invests employees into the work being done, which gives them a stronger sense of
satisfaction when the company succeeds. They know they will be rewarded for their
efforts; everyone likes to be appreciated.

Legal Compliance

State and federal laws govern many aspects of the employee's pay and hours,
including what the minimal rate is and how many hours they may work each week
before they're entitled to overtime pay. Employers must pay workers in accordance with
compensation laws to avoid lawsuits and actions by the state and federal governments.
Some rules vary by state and by employee category. For example, a salaried employee
isn't subject to all the same laws as an hourly worker.
The importance of Incentive Programs

They can range from the mundane - a special parking spot - to the spectacular -a
trip to Tahiti. Sometimes they have catchy or clever names such as employee of the
month award, going the extra mile or extra effort awards or they may simply consist of
an extra little something in your paycheck. Virtually every company, large or small, has
them.

Productivity bonuses have been around for a long time the concept dates back to
the days when manual laborers who were paid by the hour would earn extra money for
producing extra within that time. Today, around 36% of hourly paid workers regularly
receive a financial bonus or incentive, while around 20% of company executives receive
productivity incentives.

The traditional profit sharing bonus is still one of the most common incentives, if
the company makes money, all of the employees and shareholders benefit. Many
companies still give employees a traditional Christmas bonus or present the profit
sharing checks along with a celebration.

In addition to cash incentives, companies routinely offer other incentives such as

additional vacation time, merchandise or travel rewards. Sales jobs in particular often
base salary increases on long term performance.
And there is also plenty of evidence to suggest that incentives and bonuses not only
ensure more profitable employees - but a more relaxed and happier workplace as well.
Employee Incentive Programs can fully manage a company's incentive operations while
saving the organizations' managers an extensive amount of time.

The International Society of Performance Improvement points out that an

effective incentive program can increase performance by up to 25% in an employee. As
far as companies are concerned, bonuses and incentives are given to employees for
several different reasons to reward good work, to create an incentive to reduce costs
and to encourage employees to think from a shareholders viewpoint. Many employees
see things differently a bonus is their fair and expected reward for working hard and
bringing in money.

Recognizing and rewarding employee contributions and accomplishments are an

important part of creating a quality culture. When employees know that their efforts are
appreciated, it increases their self-esteem and satisfaction with their job. Their improved
attitude toward their job encourages them to aim for quality and increases productivity.
Not all employees or organizations will respond to the same type of recognition. Some
employees, for example, will respond primarily to rewards that have substantial value,
such as a percentage of the cost savings from a suggestion. For many employees, the
value of a reward is not as important as the fact that they know that their contributions
are valued.

Basis of Planning Compensation

Employee compensation can be a sensitive subject, and people get very

passionate when trying to determine the most appropriate compensation plan for any
business. Many human resource-related concerns need to be addressed, but equally
important is understanding the financial aspects of employee compensation. Employee
compensation is much more than just the direct amount that you pay an employee.
There are other costs that need to be incorporated in the overall payroll budget. Here
are five areas to consider when figuring out how to compensate employees:

1. Incentives and bonus plans need to have clear guidelines to minimize any
confusion. They shouldn't be seen as a guaranteed payment, but instead should be
measured by performance of the individual, team or company. If end-of-the-year
bonuses are given every year regardless of performance, they no longer serve as a
motivating factor; they are expected payments. Incentives and bonus payments should
be reserved for employees who go above and beyond their everyday performance to
help the company exceed its profitability goals.

2. Understand the costs of a benefit plan before you offer it. Offering benefits is a
nice incentive for employees, but they can be a very costly burden to the company. So
when assessing what benefits to add, consider not only today's direct costs, but also
long-term expenses. Adding and removing benefits can be very demoralizing to your
staff. So don't add anything you don't plan to continue long term. Of course, unexpected
situations can always arise that may affect your ability to continue offering a certain
benefit, but employees will become disgruntled when benefits are added and removed
frequently.

3. You also need to calculate employer payroll taxes into your overall payroll
budget. Employers incur expenses, such as Social Security and Medicare tax,
unemployment insurance for both state and federal entities, and workers' compensation
insurance.

4. What type of position will the individual hold? Does it best correlate with direct
payment on an hourly or salaried basis or is commission a better arrangement?
Employees in sales-related positions should have commission as a part of their
compensation package. Whether they're 100 percent commission or some other
combination depends on the circumstances. These types of positions are most
successful when their compensation is tied to their performance. It's a win-win for both
the company and the employee.

5. Payroll budgeting is a necessity. There are many aspects to budgeting for a

company, and a payroll budget is one component that should be done as well. Payroll
budgets need to include direct wage and salary payments, commissions, bonuses,
incentives, payroll taxes and insurance, along with any other directly related costs the
business incurs in the payroll function. There will only be so much money that can be
allocated to the complete compensation package and knowing that up front will help you
in setting your commission, incentive, bonus and raise strategies up front.

Elements of Good Incentive Plans

1. It aligns with Goals and Results

As mentioned, incentives are intended to encourage specific results, so a good

incentive plan should be tied to larger business goals. The first thing to figure out is
what kind of business goal you’re trying to incentivize. Is it a revenue goal? Are you
trying to grow your customer base? Do you need to increase production? Once you’ve
identified the goal, decide how you’ll measure results.

2. It considers compensation mix

“Incentive” does not necessarily equal “cash.” Rewards come in many forms,
and what’s motivating to one team or individual isn’t necessarily what would entice
another. A big part of getting your incentive plan right is knowing what form of
compensation will be most effective.

3. It accounts for your individual workforce

Similarly, you’ll need to customize your plan for your unique workforce. Are you
designing this plan for individual contributors? Managers? A mix? And what is the
nature of their work — is it service-based? Production? Knowledge?

These characteristics and more will influence what is and isn’t effective in an
incentive plan. Be sure to think through and account for them.

Additionally, think about staggering implementation of a new incentive plan by job

family or department. If you’re planning a brand new incentive plan for the entire
organization, think about where it’s going to have the biggest impact and start there.

4. It matches the speed of your business

An incentive plan that matches the speed of your business should consider both
your business lifecycle and the age of your organization.

Business lifecycle will be a big driver in deciding the cadence in which you plan,
measure and pay out a given incentive plan. A business that incentivizes revenue-
based activities should have incentive plans that follow the cadence of those revenue
activities — for example, if sales goals are measured quarterly, the results for anyone
who’s personal or team incentive is oriented to sales revenue should also be measured
quarterly.
 Organizational maturity should also be a strong consideration — is your
organization growing quickly? Is it at its peak maturity? This is most important as it
relates to cashflow and budget for incentive programs. If your organization is growing
quickly and wants to incentivize growth-based activities, this is a great alignment plan,
but you’ll want to make sure you can fund it and measure a pay out on those incentives
regularly to keep moving the needle.

5. It’s simple enough to communicate

When you start getting crazy with convoluted calculations to determine incentive
eligibility, you start losing employees’ attention — and motivation. Keep the numbers —
mix of pay incentive as % of base salary and goal ratio of individual to organization —
as simple as possible.

Advantages of Good Compensation

Performance Management

An organization's performance management system begins long before the

employee reports for her first day on the job. Performance management starts with
discussing the job duties, responsibilities and expectations with candidates during the
recruitment and selection process. Ideally, a job posting should contain a summary of
the job, the qualifications the company is looking for and what the company expects
from employees in that particular role. Consequently, when a recruiter hands a job
applicant the full job description, she's essentially saying, "This is what we expect from
the person we hire to fill this position and if you accept this, we can move forward with
the selection process."

Compensation

Compensation weighs significantly in job performance, whether formally or

otherwise. Performance management -- as it starts during the recruitment and selection
process -- has elements of compensation within the performance management
discussion, because the candidate wouldn't be in the running if the compensation level
wasn't somewhere near his expectations. Some employers have formal methods of
tying compensation to performance, such as in pay-for-performance compensation
structures. Other employers simply indicate that high performance will position the
employee for receiving more generous raises without providing any guarantees.
Nevertheless, connecting compensation to performance expectations is an ideal way to
lay the groundwork for a solid working relationship.

Compensation and Performance

The conversation about compensation as it relates to performance matters to the

employer, prospective employees and current employees. For current employees, they
should know precisely how their performance will be rewarded. Workers who aren't
certain that high performance will result in corresponding rewards -- such as salary
increase, raises and adjustments -- may not be fully engaged employees because there
are no guarantees the employer actually values their efforts and accomplishments.
Prospective employees need to know how they will be rewarded so they can determine
if your company is the right fit. The employer must determine how compensation and
performance management are connected to develop both a compensation structure and
performance management system that benefits the employer as well as employees.

Job Satisfaction

While compensation alone isn't one of the top-rated reasons why employees
leave their jobs for opportunities elsewhere, the combination of compensation and
performance management may affect the way employees interpret how the company
values, or devalues, their contributions. Employees want to feel their work is valued and
appreciated, which is in the top seven reasons why employees leave for other jobs,
according to the Saratoga Institute's study of nearly 20,000 exit interviews with
employees from 1999 to 2003. Among the reasons employees gave for leaving their
current positions, three of them have to do with the employee's expectations for
guidance, advancement and appreciation. A performance management discussion
incorporates all of these factors and, thus, they correlate to compensation once an
employee gains the knowledge, expertise and confidence in performing to his
employer's expectations.
Advantages of Incentive Programs

Motivation

Incentive plans were created for the express purpose of urging employees to
motivate themselves to higher achievement levels. Incentive plans that reward
employees for reaching pre-established goals provide encouragement and give staffers
something to aim for. The advantage to the employer is increased levels of productivity -
- and increased productivity also becomes an advantage for workers.

Increased Earnings

Most incentive plans are tied to earnings. The more revenue an employee
generates for a business, the more he is rewarded through his incentive plan.
Businesses providing incentive plans have the advantage of seeing their bottom line
rise in direct proportion to the sales their employees generate. In this sense, incentive
plans can be self-supporting, in that the business essentially pays for performance.

Loyalty

Employees who have the ability to positively impact their earning potential
through incentive plans are more likely to be loyal to the company they represent. This
is especially true if incentive plans have residual value. For example, if an insurance
company employee gets a bonus for signing up a new client, and then gets a residual
bonus for every subsequent year that client renews, earnings can increase over the life
of his employment. It becomes an advantage to the employee and employer for there to
be longevity in the professional relationship.

Reduced Turnover

Employees often look for new employment opportunities when they feel they are
under-compensated or unappreciated. Incentive plans are a way of rewarding top-
performing employees and showing them you appreciate their contributions to the
business. The advantage to the employer is reduced turnover, which also results in time
and money savings related to recruiting new hires. Businesses may also attract more
well-qualified candidates by offering incentive plans.

Collaborative Efforts

When employees work together on team incentive plans, they establish a sense
of camaraderie, pulling together for the common good. This can strengthen bonds
between colleagues, managers and business owners. The advantage of a unified
workforce is a more efficient, pleasant work environment for all. It can also enhance
regular work relationships between departments and co-workers, resulting in increased
productivity.

References

http://smallbusiness.chron.com/importance-compensation-workplace-38470.html

https://woman.thenest.com/importance-compensation-workplace-20309.html

http://www.incentivequotes.com/importance-of-incentive-programs.html

http://strategicincentives.com/faq/rewards-recognition-important

https://www.entrepreneur.com/article/183864

https://www.payscale.com/compensation-today/2017/09/5-elements-good-incentive-
plan

http://smallbusiness.chron.com/advantages-compensation-discussion-performance-
management-interview-22948.html

http://smallbusiness.chron.com/advantages-incentive-plans-55858.html