Compensation

Cash, Bonuses, Insurance,

Vacation, Holidays
Perks, Recognition

What does
compensation
(what you receive
for your services)
mean to you?

A Definition . . .

All forms of

financial return,
tangible services and
benefits

that employees receive as part of their

employment relationship
Compensation is what employees receive in
exchange for their contribution to the
organization. Generally speaking, employees
offer their services for three types of rewards

Components of Total Compensation

Total Compensation

Intrinsic Rewards
(nonmonetary)
job security
Status symbols
Social rewards
Task-self rewards

Extrinsic Rewards (monetary)

Indirect Compensation (Benefits)

(legally required)
Social Security
Unemployment
Disability

Public
Protection
Pensions
Savings
Insurance

Paid leave
Training
Work breaks
Sick days
vacation
Holidays
Personal

Direct Compensation

Miscellaneous
Benefits
Legal advice
Eldercare
Daycare
Wellness
Counseling
Moving
Perks

Basic Salary
basic
shift
premium

Performance-Based Pay
Stock Options
Bonuses
Merit
Incentive

Total
TotalCompensation
Compensation--Extrinsic
Extrinsic

Direct
Direct

Indirect
Indirect

Wages
Wages//Salaries
Salaries

Time
TimeNot
NotWorked
Worked

Commissions
Commissions
Bonuses
Bonuses
Gainsharing
Gainsharing

Vacations
Vacations
Breaks
Breaks
Holidays
Holidays

Insurance
InsurancePlans
Plans
Medical
Medical
Dental
Dental
Life
Life

Security
SecurityPlans
Plans
Pensions
Pensions

Employee
EmployeeServices
Services

Educational
Educationalassistance
assistance
Recreational
programs
Recreational programs

Components of a Total
Compensation Program - 1

Financial
Direct

wages, salaries, commissions, bonuses

Indirect

insurance plans

social assistance benefits

life, health, dental, disability

retirement plans, social security, workers comp

paid absences

vacations, holidays, sick leave

Components of a Total
Compensation Program - 2

Non-Financial
The Job

interesting, challenging, responsible

opportunity for recognition, advancement
feeling of achievement

Job Environment

policies, supervision, co-workers, status symbols,

working conditions, flextime, compressed work week,
job sharing, telecommuting, flexible benefits programs

Factors Affecting the Wage Mix

16-2

Compensation Theories
Equity Theory
The most important objective of any pay system is fairness
or equity, generally expressed in three forms
Internal equity: where more difficult jobs are paid more
External equity: where jobs are fairly compensated in
comparison to similar jobs in labour market
Individual equity: where equal pay is ensured for equal
work

Compensation Administration

Reinforcement and Expectancy

Theory
Behaviour which has rewarding experience is likely
to be repeated

Agency Theory
Employers act as Principals
Employees as Agents
Wages paid is Agency Cost
Choose a contracting scheme to align the interest

16-3

Objectives of compensation planning

Attract talent

Retain talent

Ensure equity

Reward appropriately(loyalty, commitment, experience, risk raking and other

desired behaviours)

Control costs

Comply with legal rules

Ease of operation

Compensation Administration

16-7

Wage And Salary Administration

It is the process of managing a companys compensation (base
compensation as well as supplementary) programme Base
compensation, here, refers to monetary payments to employees in
the form of wages and salaries. It is a fixed, non-incentive kind of
payment calculated on the basis of time spent by an employee on
the job. Supplementary compensation signifies incentive payments
based on the actual performance of an employee.

Compensation Administration

16-8

Wage And Salary Administration

Objectives
To establish a fair and equitable remuneration
To attract competent personnel
To retain present employees
To control labour cost
To improve motivation and morale of employees
To project a good image of the company
Principles
Wage and salary plans be sufficiently flexible
Job evaluation being done scientifically
Wage and salary plans be always consistent with overall
plans
Wage and salary plans being responsive to changing
conditions
Compensation Administration

16-10

Wage Policy In India

A wage policy offers certain guidelines for determining a wage
structure. The term wage structure refers to various pay scales
showing rages of pay within each grade. Three important elements of
wage policy in India need to be elaborated here
Minimum wage: Wage sufficient to sustain and preserve the
efficiency of the worker and offer basic amenities of life
Fair wage: It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as the
productivity of labour, prevailing wage rates, level of national
income and its distribution, the employers capacity to pay etc.
Living wage: This is the highest amount of wages proposed by
the government, offering basic amenities of life and satisfying
the social needs of worker.
Compensation Administration

 Components

of Salary

The two essential components of pay

structure are; basic wages and dearness
allowance .the basic wage rate is fixed
taking the skill needs of the job, experience
needed, difficulty of work, training required,
responsibilities involved and the hazardous
nature of the job. Dearness allowance it
paid to employees in order to compensate
them for the occasional or regular rise in
the price of essential commodities.

Variable Compensation
Types:
Individual Incentives
Merit Pay
Bonus
Commission
Profit Sharing
Stocks

Employee Benefits
Mandated

Benefits or Legally required eg EPF

Discretionary or Voluntary Benefits
Payment for time not worked eg Paid Vacation
Health and Security Benefits
Employee Services eg relocation Benefits
Premium Pay eg hazard pay, shift differentials
Work Place Flexibility

16-14

Choices In Designing A
Compensation System
performance based pay systems
To be fair to employees, organisations should keep the following guidelines in mind
while instituting merit-pay systems
Establish high standards of performance, so that only the truly outstanding
employees emerge as winners.
Develop accurate performance appraisal systems. The focus must be on jobspecific, results-oriented criteria as well as employee behaviours.
Train supervisions in the mechanics of carrying out appraisals and offering
feedback to employees in a proper way.
Tie rewards closely to performance.

Use a wide range of increases. Also, make pay increases meaningful.

Compensation Administration

16-15

Choices In Designing A
Compensation System
Suitability of job based vs. knowledge
based pay systems

A job based-pay system is suitable

when:
Jobs do not change often
Technology is stable
Lot of training is required to learn a
given job
Turnover is relatively how
Employees are expected to move
up through the ranks over time
Jobs are fairly standardised within
the industry

Compensation Administration

Individual-based pay system is suitable

when:
The firm has relatively educated
employees with both the ability and
willingness to learn different jobs
The firm's technology, processes are
subject to frequent change
Vertical growth opportunities are
limited
Opportunities to learn new skills
exist
Teamwork and employee
participation are encouraged

16-16

Broad banding vs. Competency

based pay system
Organisations that follow a skill-based or Competency Based Pay System frequently
use broad banding to structure their compensation payments to employees. Broad
branding simply compresses many traditional salary grades (say 15 to 20 grades)
into a few wide salary bands (three or four grades). By having relatively few job
grades, this approach tries to play down the value of promotions. Depending on
changing market conditions and organisational needs, employees move from one
position to another without raising objectionable questions,. As a result movement of
employees between departments, divisions and locations becomes smooth.
Employees with greater flexibility and broader set of capabilities can always go in
search of jobs in other departments or locations that allow them to use their potential
fully. Broad banding, further, helps reduce the emphasis on hierarchy and status.
However, broad banding can be a little unsetting to a new recruit when he is made to
roll on various jobs. Most employees still believe that the existence of many grades
helps them grab promotional opportunities over a period of time. Any organisation
having fewer grades may be viewed negatively as having fewer upward promotion
opportunities. Moreover, a number of individuals may not want to move across the
organisation into other areas.

Compensation Administration

16-17

Choices In Designing A
Compensation System

Below market vs. above market compensation

Open vs. secret pay

Compensation Administration