Compensation Management

Prof. K.B. Akhilesh

Dept. of Management Studies
Indian Institute of Science, Bangalore
 Learning Objectives

• In this lecture, you should be able to learn and understand the

following :
• Some meanings of money
• Elements of core compensation
• Internal equity
• Job evaluation
• Pay for performance
• Pay structure
• Wage policy
 Some Meanings of Money (1 of 2)
• A reward for work well done
• A means to support oneself and one’s family
• A status symbol—the more you make, the more
status you have in the company and in society
• Payment for doing a job—never as much as is
deserved
• A paycheck and benefits such as paid vacation
and health insurance
 Some Meanings of Money (2 of 2)
• Security
• A trap—the more you make, the more you
spend, so the more you need
• A symbol of professional achievement
• Payment for doing a job regardless of how well
the job was done
• A means of classifying people (as low-income,
middle-income, or high income)
• A company’s obligation to employees
 Elements of Core Compensation
• Base Pay
– Hourly pay
– Annual salary
• How Base Pay is Adjusted Over Time
– Cost-of-living adjustments
– Seniority pay
– Merit pay
– Incentive pay
– Pay-for-knowledge and skill-based pay
Elements of Fringe Compensation (1 of
3)

• Social Security
– Unemployment insurance
– Retirement insurance
– Benefits for dependents
– Disability benefits
– Medicare
• Workers’ Compensation
• Family and Medical Leave
Elements of Fringe Compensation (2 of
3)

• Discretionary Benefits
– Protection Programs
• Income protection programs
• Health protection programs
– Pay for time-not-worked
• Holidays
• Vacation
• Sick leave
• Personal leave
• Funeral leave
• Cleanup, preparation, travel time
Elements of Fringe Compensation (3 of
3)

• Discretionary Benefits (cont.)

– Services
• Employee assistance programs (EAPs)
• Family assistance programs
• Tuition reimbursement
• Transportation services
• Outplacement assistance
• Wellness programs
Laws That Influence Compensation

• Income Continuity, Safety, and Work Hours

– Minimum wage law
• Minimum wage
• Overtime provisions
• Child labor provisions
– Factories Act of 1948
• Contract Labor Act
 Compensation
Key Issues
• Internal Equity
• External Competitiveness
• Pay for Performance
 Internal Equity
• Job evaluation: A systematic
procedure for establishing pay
differentials among jobs within a single
organization
• Approaches:
– ranking
– classification
– factor comparison
– point method
 Ranking methods
• Simple approach
• Refinements:
– alternation ranking
• ―Whole Job‖ approach
 Point Methods
• Steps:
– Choose compensable factors
– Create factor scales
– Determine factor weights
– Calculate total JE points
• ―Part Job‖ method
 Alternatives to Job Evaluation

• Broad Banding
• Skill-Based Pay
 External Competitiveness
• Market surveys
• Sources:
– in house
– consulting firms
– government publications
– the Web
Market survey validity?

Who you ask

What you measure
 Pay for Performance:
Individual Plans
• Merit pay:
– raises based on performance evaluations
• Bonuses:
– one-time payment based on subjective or
objective criteria
• Piece rates:
– pay based on units produced
 Pay for Performance:
Group Plans
• Team-based pay:
– when team meets objectives, employees are
rewarded
• Gainsharing:
– when costs are reduced, employees share
savings
• Profit-sharing:
– when profits go up, employees share profits
 New Trend in Pay:
Stock Options

• How they work

• Motivation issues
• Who receives them
 Compensation System Process

3 Determine what people do

3 Determine how much roles are worth
3 Develop/Administer base pay program
3 Appraise performance
3 Reward performance
 Building Blocks of Direct Compensation

1. The Foundation: 3. The Glue: Pay for

A Compensation Performance
Philosophy Programs

2.The Basics: Elements 4. The Future: Effective

of Base Pay Compensation
Administration Management
 Pay Structure
q The principal control device, consisting of
minimums, midpoints and maximums

q Used to guide managers in making salary

determination decisions
 Pay Structure Example

Thousands
120
Pay Grade Maximums
110
100
90 Market Midpoint Line
80
70 Target Hiring Salaries
60
50
Pay Grade Minimums
40
30
20
10

$$Salary0

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Pay Grades
 Features

• Freedom to Act 94
• Planning 20
• Policies and Procedures 49
• Problem Solving 124
• Diversity of Knowledge 59
• Skill 43
• Licenses n/a
Total: 405
Designing Pay-for-Knowledge Programs

• Establishing Skill Blocks

– Skill type
– Number of skills
– Grouping of skills
• Transition Matters
– Skills assessment
– Aligning pay with the knowledge structure
– Access to training
• Training and Certification
– In-house or outsourcing training
– Certification and recertification
Broadbanding Structure and Its Relationship to Traditional Pay Grades and
Ranges

Grade E
Annual Salary

Grade D

Grade C
Grade B
Grade A

Band A Band B
Low High
Job Worth
 Employee Stock Terminology
• Stock option. A right granted by a company to an
employee to purchase a number of stocks at a
designated price within a specified period of time.
• Stock grant. A company’s offering of stock to an
employee.
• Exercise of stock grant. An employee’s purchase of
stock using stock options.
• Disposition. Sale of stock by the stockholder.
• Fair market value. The average value between the
highest and lowest reported sales price of a stock.
 Common Executive Perks
• Company cars
• Financial services
• Legal services (for example, income tax preparation)
• Recreational facilities (for example, country club and
athletic club memberships)
• Travel perks (for example, first-class airfare)
• Residential security
• Tickets to sporting events
Corporate Performance Measures (1 of 3)
• Size
– Sales
– Assets
– Profits
– Market value
– Number of employees
• Growth
– Sales
– Assets
– Profits
– Market value
– Number of employees
Corporate Performance Measures (2 of 3)
• Profitability
– Profit margin
– Return on assets (ROA)
– Return on equity (ROE)
• Capital Markets
– Dividend yield
– Total return to shareholders
– Price/earning ratio
– Payout
Corporate Performance Measures (3 of 3)
• Liquidity
– Current ratio
– Quick ratio
– Working capital from operations
– Cash flow from operations
• Leverage
– Debt-to-equity ratio
– Short-term vs. long-term debt
– Cash flow vs. interest payments
 Discretionary Income Expenditures
• Pension contributions
• Savings and investment
• Insurance payments
• Equity portion of mortgage payments
• Alimony payments
• Child support
• Student loan payments
• Car payments
Cash and Non cash Income Exclusions:
• Cash
– Salaries and wages
– Bonuses
– Sales commissions
– Incentives
– Professional fees
• Non cash
– Housing
– Meals
– Cars
– Allowances for cost of living differentials, education, home
leave, tax reimbursements, children’s education, and moving
expenses
 In the next lecture….
• Please keep Bare Acts of
• ID Act of 1947
• Trade unions Act of 1926
• Industrial and employment standing orders
Act