UNIT - I: Introduction to Strategic Compensation Management

Concept of compensation Exploring and defining the compensation context(What Is Compensation? ,Core Compensation,Employee Benefits) System of compensating compensation dimensionsconcept of reward Role of compensation in OrganizationNon-financial compensation system Concept of total reward systemNew trends in compensation management The 3-P compensation concept.

 Compensations is referred to as money and other benefits received by an employee for providing services to his employer. Compensation is one of the important motivating factor in the eyes of HR management. Compensation includes direct cash payment, indirect payments in the form of employees benefits and incentives to motivate employees to strive for higher level of productivity. The services or work can be as part of full time engagement or part time in nature. It can be said that compensation is the concept 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. Compensation may be adjusted according the the business needs, goals, and available resources The art and science of arriving at the right compensation makes all the difference between a satisfied employee and a disgruntled employee.

CONCEPT OF COMPENSATION

 For an employee getting the right compensation is a motivating factor. Hence, employers need to quantify the employees contribution in a proper manner if they are to get the best out of the employee. The provision of monetary value in exchange for work performed forms the basis of compensation and how this is managed using processes, procedures and systems form the basis of compensation management. Importance of Compensation management Compensation management is something that companies must take seriously if they are to achieve a competitive advantage in the market for talent. The concept 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.

Aims of Compensation management Compensation aids in attracting capable employees to the organization. It also helps motivate employees towards superior performance. Compensation also helps in retaining the employees and their services over an extended period of time. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and self-actualization needs to fulfill. Thus, compensation serves the purpose. Types of Compensation and Benefits 1. Base Compensation 2. Variable Compensation 3. Supplementary Compensation

Base Compensation Base Compensation is a type of compensation which refers to the basic salaries and wages given to the employees. It is normally constant at a given amount irrespective of the difference in work performance. Factors influencing Base Compensation and Benefits

Demand and supply of labor in the market. Labor union pressure: This is because unions always try their best to fight for their members rights. Nature of job as determined by the job description, each employee deserves a different compensation package. Size of the organization and its ability to pay its employees. Product market compensation. Psychological and social factors like employee satisfaction and security. Salaries paid by similar firms. Government policies on wage determination Cost of living of the employees. When the employees cost of living is very high then they need a higher compensation benefit. Increase in productivity of labor Firms in general; whether competing firms or not.

Variable Compensation and Benefits This type of compensation as by its name is variable. It means that one gets compensation as per the work done. If one does a remarkable job then he or she deserves a higher compensation package than one whose work is of poor quality. Supplementary Compensation and Benefits Supplementary Compensation is compensation given by an employer when he or she wishes to. It is not compulsory or a routine once one is given the compensation that one will be awarded another time. In this type of Compensation the employer has a right to add, deduct or even withdraw the benefits when he or she wishes to.

Types of Compensation and Benefits

Compensation provided to employees can direct in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary but it is the sum total of all rewards and allowances provided to the employees in return for their services. If the compensation offered is effectively managed, it contributes to high organizational productivity. Compensation and Benefits can be categorized into Direct Compensation Indirect Compensation

Direct Compensation Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

Basic Salary :Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. House Rent Allowance :Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work. Conveyance Allowance: Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them. Leave Travel Allowance: These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization. Medical Reimbursement: Organizations also look after the health conditions of their employees. The employees are provided with medi-claims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements. Bonus: Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one months salary of the employee. Special Allowance :Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity

Indirect compensation Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.

 Leave Policy: It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc. Overtime Policy: Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. Hospitalization: The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security. Insurance: Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization. Leave Travel :The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free. Retirement Benefits: Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.

 Holiday Homes: Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house. Flexible Timings: Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.

How is compensation used? Recruit and retain qualified employees: Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertize those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Increase or maintain morale/satisfaction: Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expence of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels. Reward and encourage peak performance. Achieve internal and external equity. Reduce turnover and encourage company loyalty. Modify (through negotiations) practices of unions. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing.

Principles of Compensation Compensation will be perceived as fair if it is comprised of a system of components developed to maintain internal and external equity. What are the components of a compensation system? Job Descriptions: A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. Job Analysis:The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. Job Evaluation: A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. Pay Structures: Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is pre-determined through collective bargaining.

 Salary Surveys:Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company. Policies and Regulations