Compensation Management

If you pick the right people and give them the opportunity to spread their wings - and put compensation and rewards as a carrier behind it - you almost dont have to manage them. Jack Welch The sum total of all forms of payments orrewards provided to employees forperforming tasks to achieve organizational objectives Most of us would have heard the term compensation in the context of getting paid for the work that we do. The work can be as part of full time engagement or part time in nature. What is common to them is that the reward that we get for expending our energy not to mention the time is that we are compensated for it. From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something that they need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in broad agreement (We use the term broad agreement as in many cases, significant differences in perception about the employees worth exist between the two sides), the net result is dissatisfaction from the employees perspective and friction in the relationship. It can be said that compensation is the glue that binds the employee and the employer together and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that spells out exactly how much should be paid to the employee and the components of the compensation package. Since, this article is intended to be an introduction to compensation management, the art and science of arriving at the right compensation makes all the difference between a satisfied employee and a disgruntled employee. Considering that the current trend in many sectors (particularly the knowledge intensive sectors like IT and Services) is to treat the employees as creators and drivers of value rather than one more factor of production, companies around the world are paying close attention to how much they pay, the kind of components that this pay includes and whether they are offering competitive compensation to attract the best talent. In concluding this article, it is pertinent to take a look at what Jack Welch had to say in this regard: As the quote (mentioned at the beginning of this article) says, if the right compensation along with the right kind of opportunities are made available to people by the firms in which they work, then work becomes a pleasure and the managers task made simpler leading to all round benefits for the employee as well as the employer

Compensation-Nature and scope The complex process includes Decisions regarding variable pay and benefits It suggests an exchange relationshipbetween the employee and theorganization It involves design, development ,implementation, communication and the evaluation of reward strategy and processof the organization Compensation Objectives 1.To reward employees past performance fairly, in linewith efforts, skills and competencies 2.To attract and retain competitive high performingemployees 3.To motivate the high performing employees andreinforce desirable employee behaviour 4.To remain competitive in the labor market 5.To align employees future performance withorganizational goals 6.To communicate the employees their worth to theorganization 7.To provide employee social status

Classification of Rewards
Total compensation include financial(Extrinsic Rewards) and Non Finanacial(Intrinsic Rewards) Financial(Extrinsic Rewards) have 1.Direct Rewards Basepay Wages Salaries __Variable Pay o Incentives o Individuals o Group team o Organisational 2. Indirect Rewards(Benefits) Mandatory Provident Fund Gratuity Maternity Leave Health plans Medical leave voluntary Vacations, Breaks, Holidays Security Plan (Pensions) Educational assistance Recreational Programs

Non -Financial(intrinsic rewards have 1. Satisfaction derived from job 2. Praise and Rewards

The Commonwealths compensation philosophy is to pay employees in a manner sufficient to support and develop a high performance workforce that provides quality services in a fiscally responsible manner to the citizens of Virginia. The compensation philosophy was developed based on the following underlying principles: o provide more flexible base pay systems that tie employee performance to T agency or unit performance. To link accomplishments of agency or unit missions, objectives and operating efficiencies to the funds available for employee salary increases. To focus on the value of total compensation, which includes salary and nonsalary benefits such as healthcare, retirement, life insurance; disability

insurance, annual and sick leave. To establish base pay that is competitive with the labor market (public and private). To encourage employees to make a performance difference either individually or through teams where results/outcomes are more important than entitlements (i.e., seniority, hierarchy or expectation of additional pay for changing responsibilities). To provide salary increases that focus on employees gaining demonstrable skills and competencies that are critical to the accomplishment of agency or unit missions. Based on this philosophy, the Compensation Management System must recognize, accommodate and support agency differences in organizational structures and missions; assure that comparable jobs are valued with similar methodology and assigned to the same Role; promote employee focus on agency missions and outcomes; be market responsive and affordable; be administratively efficient and responsive; and be easily understood and communicated. The following goals have been identified in order to support and operationalize the Commonwealths compensation philosophy. To attract qualified employees. To retain qualified employees. To motivate employees by rewarding sustained performance. To support management in the realization of organization objectives.

Determination of inter an intra industry compensation 1.Determination of inter industry compensation

Size of Industry Larger size organizations characteristics are higher profits,a lower ratio of labor costs to total cost, few industry competitors 1. These pay higher wages and benefits for a number of reasons :-

2. They usually are able to. 3. They have some financial surplus, which they can use in various ways. 4. to attract a pool of competent applicants. 5. perceived obligation to counter lower job satisfaction. The high-wage employer may be part of a national organization whosemajor compensation decisions are made at the corporate level. For example, New York headquartered corporations often appear topay higher than local competitors Low-Compensation Employers They have low-paying ability because of the constraints of their productmarket. Most of their compensation decisions may be explained by thislow ability to pay. Using compensation surveys, they usually pay attention to rates for specific jobs for which there is an active outside market. Jobs onwhich attention is focused obviously varies by industry. The minimum feasible compensation is one that will obtain just enough employees to maintain desired employee levels for some period,typically six months. But often organizations pay above this minimum,hoping to obtain employees of higher quality; lower their turnover rates;and lower their recruitment, hiring, and training costs

Market Rate Employers most common compensation level strategy followed byorganizations is to "pay the market." These organizations wishto treat their employees fairly and yet not to raise their costssignificantly more than their competitors To pay the market rate an organization collect compensationdata and determine from that data exactly what the market rateis. This strategy can be characterized as being reactive to themarket, so the organization keep constantly in touch with other organizations to find out what changes are occurring inemployee pay Labour Market Low-pay organizations adjust to changes in labor demand bydeciding how far they can lag behind high-payingorganizations. During an economic upswing, high-payemployers will be increasing wages, salaries, benefits, andemployment. Low-pay employers, to hold down turnover and toincrease employment, will have to raise compensation morethan high-paying firms. The compensation gap between high-paying and low-paying firms thereby narrows during anupswing.During a downswing, high-pay firms stop hiring and may lay off employees. Low-pay firms find that they have more and better applicants and

less turnover. This means they can lag further behind the compensation leaders and that the inter-companydifferential widens. Inter-industry and Firm-size WageDifferentials Experience Knowledge and skills possessed Training Working conditions Department Levels

Differentials
The pay differences among levelsPay is determined by:Knowledge/ skills involved Working conditionsValued addition to the companyIntention of these differentials: To motivate people to strive forpromotion to a higher-paying level

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