EXECUTIVE BACHELOR HUMAN RESOURCE MANAGEMENT

CONPENSATION MANAGEMENT

ASIA E UNIVERSITY
PREPARED BY :

IGE MANJUNG

1) Elucidate the frame work of conpensation policy of organisation

Compensation
In addition to competitive basic pay rates and regular salary increases,
depending on the type of job held, most employees may also receive overtime
pay, night shift differential, and Sunday premium pay.
The compensation policy is the basic document, which drives the detail of
the compensation practices in the organization. As the compensation strategy
sets the high level compensation goals of the organization, the compensation
policy describes the details of the individual compensation components, their
behavior and their role in the compensation scheme of the organization.
The compensation policy describes the details of the compensation
components in the organization, how they are used and the conditions for
the employees as the compensation component can be applied in their
specific situation.
Each organization uses many compensation components and they have to be
described. The compensation policy provides the basic explanation of the
compensation component, how it is calculated, who is eligible for the usage
and the approval procedure.
The compensation policy belongs to most read and discussed internal
policies of the organization as it drives the salaries of the individual
employees. Each employee is interested in the structure of the salary and the
potential total cash achievable in the organization. The compensation policy is
the main tool to find out the details about the compensation components and
the way, how to achieve the highest total cash.
The compensation policy drives the effort and performance of employees as
the employees will find the smart and easiest way how to achieve the highest
possible income with the smallest possible individual performance. The
compensation policy has to be set the smart way as it avoids the potential
work-around and abuse.
The compensation policy has to be transparent and it has to provide just the
only way of the interpretation. It is extremely important, the employees and
managers are not unsure about the compensation component and they

understand clearly, what conditions are applied for the approval of the specific
compensation component.
The transparent compensation policy supports the high performance
corporate culture organization as the employees understand, what behaviour
and performance levels are expected to be eligible for the specific
compensation component and it drives the behaviour and performance
specifically the right way for the organization.
The policy has to cover all the compensation components, which are used in
the organization and affects large populations. The exceptional managerial
component tools can be referenced from the general compensation policy, but
they should not stay hidden. The employees cannot trust the compensation
policy, which does not mention all the compensation components.

1 (b) Explain the various types of incentives meant for blue colour workers
Incentive plans are used to motivate employees to increase production.
According to the business resource Business Town, employees given an
incentive plan tend to feel more attached to the company's success and may
work harder to help achieve it. Incentives can come in many forms.
Stock Options
A stock option is an incentive offered to employees that want to invest their
money into the company stock by purchasing stock with pre-tax money.

According to HR Guide, employees that participate in a stock option incentive

plan are able to defer paying income tax on the gains realized by their stock
purchases until the stock is sold. The company itself does not get any kind of
tax break by offering a stock option incentive, but it does reap the benefits of
selling more stock.
Profit Sharing
According to Business Town, profit sharing is another incentive plan done with
pre-tax dollars. The company sets aside a portion of their pre-tax profits and
distributes that money to the employees. In most cases, an employee must
qualify to receive profit sharing by meeting company performance metrics,
and by having a predetermined amount of service in with the company. Some
companies offer to place the pre-tax dollars into the employees' company
retirement plans, so it can add to future fund growth. Companies may also
develop a profit sharing percentage based on the amount of time worked for
the company, the position held within the company or a combination of both
conditions.

Performance Units
According to the Society for Human Resource Management, one type of
incentive plan for executives is known as the performance unit. In the
executive's agreement there is a schedule of financial milestones that the
company must achieve for the executive to get awarded a pre-determined
amount of units. The amount of a performance unit varies by company.
Performance units are paid out based on a schedule agreed to by the
executive and the company.
Bonus Pay
The bonus pay structure is common in professions such as sales, marketing
and production. When the employees reach a predetermined goal, the
company may create an incentive plan that pays a bonus for going beyond
that goal. For example, if a manufacturing plant has a goal of 100 units in a

month, the company may offer to pay each employee a bonus for each unit
manufactured beyond 100 in that month.

2 (a) Job evaluation forms basis of compensation management. Discuss what

you know about this Job Evaluation

The objective of job evaluation is to determine which jobs should get

more pay than others. Several methods such as job ranking, job grading, and
factor

comparison

are employed in

job

evaluation. Research indicates,

however, that each method is nearly as accurate and reliable as the other in
ranking

and

pricing

different

jobs.

Job

evaluation forms the

basis

for wage and salary negotiations.

Job evaluations will determine the salary grade of a job and may occur at any
time during the year. The table below describes the most common reasons for
a job evaluation and the corresponding actions.
In the event that a department manager/supervisor would like to recommend
a job evaluation, he or she should contact his or her human resources
representative to discuss the situation and process for conducting the
evaluation.
If the HR representative and department manager/supervisor reach
agreement that an evaluation is necessary, they will then complete ajob
(re)evaluation tool, obtain the necessary departmental approvals for the
review, and then forward the request to the Compensation unit for review.

Once the Compensation unit has reviewed the request, a recommendation

will be sent back to the HR representative. Any pay changes resulting from
the Compensation unit's recommendation will follow the salary increase
guidelines.

Job evaluation (Internal equity)

Job evaluation is the systematic process for assessing the relative worth of
jobs within an organization. A comprehensive analysis of each positions
tasks, responsibilities, knowledge, and skill requirements is used to assess
the value to the employer of the jobs content and provide an internal
ranking of the jobs. It is important to remember that job evaluation is a
measurement of the internal relativity of the position and not the incumbent in
the position. This analysis can also contribute to effective job design by
establishing the organizational context and value of the job, and to hiring and
promotion processes by providing job analysis on skill and competencies
required to successfully meet job requirements.
Job evaluation provides a rational and consistent approach for determining
the pay of employees within an organization. Paying fairly based on internal
relative worth is called Internal Equity. Job evaluation can be used
independently, although it is usually part of a compensation system designed
to provide appropriate salary ranges for all positions. This process will ensure
an equitable and defensible compensation structure that compensates
employees fairly for job value.
When to conduct job evaluation
The job evaluation process should be conducted after completing a job
analysis but before creating a compensation programcompensation program.
Job evaluation should be conducted for every new position in order to ensure

the organization is hiring the correct level based on expected tasks,

qualifications and responsibilities of the job. Job evaluations should also be
conducted when a job has changed substantially in order to reflect the current
role, which is known as reclassification or re-evaluation.
The goal is to identify what is required to ensure satisfactory performance
and/or progression. Therefore, the same criteria should be used when hiring a
new employee, during the establishment of goals and expectations, in
recognizing achievement, or in promotion of an employee.
2 (b) Analyze the factors involved in formulating compensation package for
marketing professionals

According to the Bureau of Labor Statistics, marketing workers are typically

classified into one of three major categories: survey researchers, market research
analysts and marketing managers. Salaries for each of these different types of
positions vary. Starting salaries at a marketing agency can be low in comparison to
other business fields, but the earning potential can offset the lower pay in the long
run.

compensation plan will have a base salary attached. Sure, it might seem inviting to
hire sales agents who do not get paid unless a deal closes. However, you risk hiring
less-qualified or less-dedicated sales professionals with a commission-only package.
A commission-only sales agent has a feast or famine mentality. If he is not closing
business with your company, he will not stay with your business for very long. This
type of sales agent is generally operating in his best interest rather than your
company's or the client's. Paying a sales agent a base salary ensures that he can
support himself while going through training or building relationships with prospects.
A 30 percent base with 70 percent commission is fairly typical in most sales
environments.

Commission
Well-structured commissions can serve as a wonderful incentive for your sales force.
The more money sales agents make by meeting or exceeding sales targets, the
harder your sales force will work to exceed them. The best sales compensation
plans have a competitive base salary and a tiered commission structure. The better
your agents perform, the higher the commissions. This pay-for-performance model is
commonplace in many sales environments. Some companies may also pay more
commission when agents sell to new versus existing customers or focus on new
products versus existing ones.
Bonuses
While commissions are earned whenever a sales agent closes business, bonuses
are earned when a sales agent exceeds her sales target. Bonuses reward superior
performance and may be paid quarterly, semi-annually or yearly. Bonuses may come
in the form of cash incentives or an all-expenses-paid vacation package. An ideal
compensation plan will have several bonuses in addition to commissions and a base
salary for agents.
Considerations
Make sure your compensation plan includes a base salary, tiered commission
structure and multiple bonuses if your aim is to create the best plan. Your
commissions should be structured so that your agents will meet sales targets while
the targets for bonus awards should be set so that your agents supersede the annual
sales target. Be careful not to set commission or bonus payout goals too
aggressively. Your aim is to motivate your agents not discourage them. Review
performance to determine how well agents did and then set reasonable expectations
for the revenue your agents will bring in.

Sales, marketing and business development staff typically have both fixed and
variable salary components that together comprise each employee's total
compensation. At higher levels in an organization, the amount of variable
compensation is usually greater than at lower levels because it is only paid when

sales goals are met. Some salespeople may not have any fixed component of pay at
all and instead are paid a commission for each sale they make.
Fixed Compensation
Most non-commissioned staff in sales, marketing and business development have a
fixed component to their earnings, which is essentially a guaranteed payment. The
fixed component is paid as either an hourly rate or as an annual salary, depending
on a job's classification as exempt or non-exempt from overtime. By federal law,
hourly employees also receive overtime pay for each hour worked beyond 40 hours
in a work week. In some states, a similar law applies to salaried employees as well.
Variable Compensation
Staff at all levels may also earn a bonus or incentive. For sales, marketing and
business development employees, incentives are usually based on individual, team
and company sales goals. Unlike a fixed component, such as a salary, bonuses and
incentives are variable pay because the amount an employee is paid varies based
on actual performance. Bonuses and incentives are also called "at risk" pay, because
there is no guarantee that an employee will receive any compensation at all if, for
example, sales targets are not met.
Pay Mix
Most organizations establish a pay mix, the ratio of fixed pay to total compensation,
that varies based on an employee's role and level in the organization. Hourly and
salaried employees at lower levels may have an 90/10 pay mix, meaning that only 10
percent of pay is at risk if conditions aren't met to earn the incentive. These
employees have less opportunity to directly influence sales, so have a lower risk.
Full-time sales staff and higher level management may have a 70/30 pay mix,
meaning that 30 percent of pay is at risk if incentivized goals aren't met, because of
their ability to directly influence sales.
Sales Commissions
Some sales staff may not have any fixed pay component at all, or may have a very
small fixed component. These employees are typically paid a commission for each
sale they make, usually a percentage of the total sale. Commissioned salespeople

have high risk and high reward. The risk is that they will have no income if they don't
sell anything. The reward is that they can make substantially more money than other
employees when they sell a lot. In fact, it's not unusual for the top salespeople in a
company to make more money than the CEO in any given year.

3(a) Explain various forms of wage differential

COMPENSATING WAGE DIFFERENTIALS:

Different wages paid to different workers or in different markets that adjust for
differences in the jobs or in the productivity of the workers. Wage differentials occur
for many reasons. Quite often they are the result of the personal preferences of
workers. In some cases workers are willing to "buy" leisure-time or other types of
household production by taking lower wages. Differences in job risks, education, and
location are also reasons for the persistence of wage differentials.
Wage

differentials

observed

in

the

labor market are

often

compensatingwage differentials. Some employers find it necessary to pay higher

wages to compensate workers for dirty, dangerous, and generally undesirable
working conditions. Other employers can pay less for comparable work because
conditions are more pleasant.
Three reasons for compensating wage differentials are worth noting:

Risk and Hazardous Conditions: Jobs that are riskier, more dangerous, and
have a greater likelihood of injury, typically pay higher wages. For example,
coal miners, deep sea divers, and security guards are likely to be paid higher
wages than similar jobs due to the hazardous nature of their duties.

Education and Skill: Jobs that require more education, skill, and training also
tend to pay higher wages. Higher wages compensate for greater productivity
and provide returns on investment in education and training.

Location: Jobs that are at undesirable, more distant, or hard to reach locations
also pay higher wages. Firms in cities that have high living costs, inhospitable
climates, high crime rates, or other "disamenities" find it necessary to offer
higher wages to attract workers.

Compensating wage differentials have an important allocative function for the

economy for two reasons:

First, they provide incentives for people to undertake less desirable work. If
society decides that resources need to be allocated to production that
involves undesirable work, then compensating wage differentials are
necessary. Without extra wages, this work is not done.

Second, they provide incentives for employers to reduce the undesirable

nature of the work. If otherwise identical firms have different working
conditions, then one is forced to pay higher wages to attract workers. Higher
labor cost encourages employers to improve working conditions to remain
competitive.

As long as workers have complete information about the risks and hazards of a job
and are free to choose between different employers, then compensating wage
differentials are allocatively efficient. This is important in terms of government worker
safety regulations--primarily undertaken by the Occupational Safety and Health
Administration (OSHA).
A key function of OSHA is to reduce the amount of risk that workers face. However,
some workers undertake more risky jobs to receive higher compensating wages. If
the amount of risk is reduced, then so too are the wages (and presumably the

welfare) of these workers. By attempting to help workers, OSHA can actually make
them worse off.
Of course, if the labor market is not competitive and does not have well-informed
workers, then job-related risks do not generate compensating wage differentials.
Such is the case for jobs that use new and untested technologies. For example, the
risks of coal mining and deep sea diving are well known and generate relatively high
compensating wages. However, the risks of working for extended periods with
computer video screens or recently developed chemicals are not yet known.
While wage differentials can enhance efficiency, they can also inhibit efficiency.
When caused by discrimination, union market power, or government policies, wage
differentials create inefficiencies in the economy.

Executive Duties
Executives typically are considered exempt employees, which means they can be
paid a salary without overtime requirements. Generally, to be considered an
executive, an employee must regularly supervise two or more employees and have
the ability to hire and fire. Additionally, the employee's duties should be primarily
managerial in nature.

Administrative Duties
Administrative duties include those that are essentially nonmanual and relate to
some type of office function. Additionally, to be considered exempt under the
administrative duties exception, the administrative employee must be able to
exercise discretion and independent judgment regarding significant matters.
Therefore, this exception does not include administrative assistants, for example,
since these employees have little discretion over significant business matters.

Other Major Exceptions

Three other categories of employees are considered exempt under the FLSA. The
one that is most likely to impact small businesses is the exemption for professionals.
For example, if a small law firm hired a new associate attorney, that attorney, as a
licensed professional, would be exempt from the FLSA overtime requirements. The
same would hold true for accountants or other professionals. The other two
exceptions are for outside sales representatives and computer analysts or
professionals.

3 (b) List out and explain the various incentive plan design by compensation experts.
Companies are being forced to totally rethink their business model and marketing
strategy as a result of an extremely challenging economic marketplace. Stakeholders
and boards are demanding increases in the bottom line. Because of the economic
stagnation, companies are finding it increasingly more difficult to increase prices, and
are facing market pressures to drop prices even further.
In the past, as revenue increased, sales commission plans built on revenues actually
created an unintended, yet, de facto increase in commissions. This invisible
increase in compensation resulted from sale of the same units with increased
costs. The economic situation has put a halt to run-away sales and price increases,
and actually exacerbated the pressure on margins. More importantly than before, it
is critical that companies take a hard look at their sales commission plans, and
determine if the company and their sales force are actually being well-served by a
pay program that in all likelihood needs to be revamped.
A well-designed sales compensation package will enable the company to focus its
sales activities on desired results, tie the rewards directly to achievement level, and
be sufficiently flexible to handle future market shifts. As the organizations business
model and marketing plan vary, the sales compensation package needs to reflect
this new strategy.
The key to a successful sales compensation program can be achieved in four (4)
steps:

1. Clearly defining sales expectations and goals that are realistic but
challenging.
2. Tracking and accurately measuring performance against expectations.
3. Rewarding achievement with competitive compensation and motivational
features that provide a Win/Win for both the company and the sale force.
4. Monitoring the results, modifying the plan when necessary, and keeping the
sales personnel informed.

Sales compensation packages typically comprise one or more of the following

components:

Base salary or draw against commissions

Commissions tied to short-term goal attainment

Incentives/bonuses tied to annual sales results

Spiffs and other focused incentives

Achievement or Career recognition

Participation in long-term equity type plans, particularly for Super Stars