Compensation Management System

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.

Why Compensation Management System

Compensation is a vital part of human resource management, which helps in encouraging
the employees and improving organizational effectiveness. Compensation packages with
good pay and advantages can help attract and retain the best employees.

Dimensions

1. Compensatory

Direct compensation includes money paid to employees as cash, such as hourly wages,
salaries, bonuses and commission. Wages and salary typically fall under the category of base
pay whereas bonuses and commission fall under the category of variable pay.

1. Pay for the work performed, pay for time not work (a work that an employee
performs, and his/her holidays and leaves)
2. Loss of job in continuation, disability income continuation
3. Deferred income (Social security, GP fund delayed income)
4. Family income continuation, health, accident and liability protection
5. Income equivalent payments
2. Non Compensatory dimension

Indirect compensation is still monetary in nature — meaning it has a financial value that can
be calculated — but is not a direct payment in the form of cash. What is considered indirect
compensation can vary across organizations but typically includes much of the benefits
package that comes with employment, such as employer sponsored health insurance and
employer contributions to an employee’s 401(k) retirement plan. Stock options and profit
sharing also usually fall under indirect compensation as can some other employee benefits
such as tuition assistance or a company-paid gym membership.

1. Dignity and self enhancement (self-actualization self-esteem self-growth)

2. Enhanced psychological health (Psychological wellbeing of employees to perform
well)
 3. Intellectual growth and emotional maturity (human resource development which help
them to perform well). (recreational trips, leaves and outing)
4. Constructive networking (expense incurred by organization to create conducive
environment)
5. Job characteristics model resource allocation & autonomy

Turner and Lawrence’s requisite task attributes theory laid the foundation for what is today
the dominant framework of defining task characteristics and understanding their relationship
to employee motivation, performance and satisfaction: Hackman and Oldham’s job
characteristic model (JCM). According to JCM any job can be described in terms of five core
job dimensions, defined as follows:

Skill Variety

It is the degree to which the job requires a variety of different activities so the worker can use
a number of different skills and talents.

Task Identity

The degree to which the job requires completion of a whole and identifiable piece of work.

Task Significance

The degree to which the job has a substantial impact on the lives or work of other people.

Autonomy

It is the degree to which the job provides substantial freedom, independence, and discretion to
the individual in scheduling the work and in determining the procedures to be used in
carrying it out.

Feedback

The degree to which carrying out the work activities required by the job results in the
individual obtaining direct and clear information about the effectiveness of his or her
performance.

Result
The five factors mentioned above in the Job Characteristic Model create three psychological
states that motivate workers. There are:

Meaningfulness

It is the degree to which the individual experiences the job as generally meaningful, valuable,
and worthwhile. This cognitive state involves the degree to which employees perceive their
work as making a valued contribution, as being important and worthwhile.

Responsibility

It is the degree to which individuals feel personally accountable and responsible for the
results of the work. This state is concerned with the extent to which employee feels a sense of
being personally responsible or accountable for the work being done.

Knowledge of results

It is the degree to which individuals continuously understand how effectively they are
performing the job. Coming directly from the feedback, this psychological state involves the
degree to which employees understand how they are performing in the job.

Develop such job nature in which inbuilt motivation to work and employees are performing
and their intrinsic motivation is increased.

Components of compensation

1. Basic wages & salaries

In a compensation package, these typically make up the single largest component. This
comes as no surprise since they are what potential and current employees use as a common
point of comparison. The person's experience and skills should determine the salary, with
subsequent increases in the future depending on the employee's value, performance level, and
contribution to the company.

2. Add ons
a) Overtime

Over time includes payments 2x or 3x rates for working extra, e.g. a worker usual working
hours are 40 hours a week or 8 hours a day, if the labor works on weekends or works extra
time than usual hours.

b) Piece rates
Piece rates includes payments per product or service output by selling or making extra
products.

c) Holidays

Time off includes vacations, holidays, personal days, bereavement, and sick days. For
employers who are unable to offer competitive wages and salaries, they usually seal the deal
by offering more time off. Some employers might not make any distinction between vacation,
personal, or sick days which allows the employee schedule time off when needed through the
year at their discretion.

3. Incentive plans (variable pay for performance)

a) Bonuses

Employee bonuses are one common way employers provide performance incentives and are
usually paid out annually, often at the end of the year, in a single lump sum. A formal way of
doing this is through profit-sharing plans. However, these are often tied to the company’s
success versus for rewarding and compensating employees for their individual performances
and meeting goals.

b) Long-Term Incentives

Part of a competitive package could include stock grants or stock options to serve as a long-
term incentive.

c) Awards

Include items such as gifts, monetary rewards, service award presents, and items such as gift
certificates e.g. employee of the month, best employee of the year etc. An additional example
is employee referral awards that some companies use to encourage employees to refer job
candidates.

d) Extra achievement

Include actions such as thanking employees, praising employees, presenting employees with
a certificate of achievement, or announcing an accomplishment at a company meeting.

4. Benefits and services

a) Health Insurance
Health insurance is fairly standard with medium to large-size companies and some small
businesses. Health insurance offers great value to the employees and saves them money since
it is employer-sponsored. This offers employees with peace of mind since they know they
have coverage; even with existing health issues.

b) Life and/or Disability Insurance

This type of insurance will usually cost the employee less if purchased through the employer
and is an option.

c) Retirement Plan

A common practice for employers is to offer a 401(k) plan since it is less expensive than
regular pension plans and fairly easy to administer. Employees have more control over how
much they contribute and invest which is why they like these plans. Many employers match
the amount invested or at least contribute in some way. Smaller companies will still try to
have a plan in place for their employees but might not contribute any money to them.

d) Miscellaneous Compensation

This type of compensation can include things like employee assistance programs that may
offer anything from legal assistance to psychological counseling or company cars to company
discounts.

Overall, a competitive salary, and health insurance are standard practice for attracting and
keeping talent in a company. Companies can offer a more competitive employee package to
bring in and retain the higher calibre staff that can add extra profit to their bottom line.

Factor determining rates of pay/ structure of pay

1. KSA, competencies of an employee

Pay based on competencies, the knowledge, skills, and abilities that make employees
valuable to an organization.

2. Type of business
a) Public sector

The pay of public sector organization is not much higher because the moto is public welfare.

b) Private sector
The pay of private sector organization is luxury in terms of perks and privileges.

Unionized Vs Non-Unionized

A unionized workplace is a process of organizing the employees of a company into a

labor union which will act as an intermediary between the employees and company
management.

In a non-union work environment, the employer holds the majority of power. ... On the other
hand, in a union environment, employees have more control. Through their union, employees
can negotiate workplace contracts that include details about work expectations, wages,
schedules, discipline, promotions, etc

a) Capital intensive organization

An organization heavily relying on tech, machinery due to which their labor size is low so
they can pay more salary

b) Labor intensive organization

An organization more relying on manual system so their labor force is higher therefore their
wages are low. Pay package is not attractive in nature

These two are also linked with the financial condition of the company.

c) Size of business/Profit

If the organization size is small or it is in the growing stage therefore their profit is low so
that their pay plans are low and viceversa

d) Philosophy of management

Philosophy of management is related either the organization is utilitarian in nature or

considering human resource as cost to benefit analysis, in which firms take more benefit e.g.
paying 1x and taking 3x benefit from workers. So on the basis of philosophy of management
managers take pay structure decisions

e) Total compensation/ lump sum pay

  A total compensation statement (TCS) is pretty self-explanatory: It's a document that
outlines in detail an employee's direct and indirect compensation – including all cash
income plus the value of all benefits received.
 A lump-sum payment is an often large sum that is paid in one single payment instead
of broken up into installments. ... They are sometimes associated with pension plans
and other retirement vehicles, such as 401k accounts, where retirees accept a smaller
upfront lump-sum payment rather than a larger sum paid out over time

Geographical location/ hard area allowance

A hard area allowance is paid to an assignee as incentive to accept an assignment in a hard

area location and/or as compensation for adapting to the difficult environment. ... The hard
area allowance is typically calculated as a percentage of annual base salary, provided to the
employee through the term of the assignment.

Demand/Supply of labor, employment stability, gender differences

HR environment is analysed on the basis of demand and supply of workers in the

environment if supply is higher then you’ve multiple choices and organization bargaining
power id high.

And if the supply is low then organization can offer more competitive salary to attract and
retain the qualified work force.

Employment stability

If there is employment stability in the organization means turnover is low and employees are
retained, then organization has option to less add ons and viceversa

Gender Differences

Organizations pay less salary to females Disparities between men's and women's wages in the
United States hinders economic growth by constraining family incomes and spending power.

Job evaluation & pay structure

In order for wage levels to be effective and fair, you must establish a scale you use to rate
jobs in your organization. The job evaluation is the tool employers use to measure each
position's contribution level to the company. Perform a job evaluation in order to have a basis
for the pay structure in your company.
 1. Whole job ranking

Divide all jobs in your company into categories/ranks based on importance. Establish a rank
with increasingly important jobs grouped at the high end of your pay scale and decreasingly
important jobs approaching the low end of your pay scale. Rate importance on a scale of 1 to
100.

2. Position

Use all your criteria: importance, responsibility, education level, nature of job and
physicality. Add the numbers you have assigned to each job in these four areas, and you will
have a position ranking. This completes your job evaluation, and you can assign
compensation ranges to each position whether its functional or conceptual.

3. Market pricing method

Market pricing is defined as the process of analyzing external salary survey data to establish

the worth of jobs, as represented by the data, based upon the “scope” of the job (company
size, industry type, geography, etc.). ... Job descriptions are used to match appropriate jobs.

4. Maturity curve method (Learning curve skills)

A process of determining employees' salaries as a function of years from the time of the first
degree earned. This term is also used to describe a method of market survey data collection
and reporting that expresses average/median pay as a function of years since Bachelor's
degree.

5. Compensatory factor approach

Compensatory strategies are techniques or modifications to our behavior or environment that

are used to compensate for a deficit, weakness, injury, or perceived inadequacy in a specific
area or skill. They help us cope with what we think of as a personal weakness.

6. Point curve method

Point curve method means giving points to each job tasks and payments are planned
accordingly e.g. point allocated to the job of security guard of bank

7. Team-based incentive plan

In an attempt to increase the flexibility of their workforces, a growing number of firms are
redesigning work to allow employees with unique skills and backgrounds to tackle projects or
problems together. For instance, at Compaq Computer Corp., as many as 25 percent of the
company’s 16,000 employees are on teams that develop new products and bring them to
market. Employees in this new system are expected to cross job boundaries within their team
and to contribute in areas in which they have not previously worked.

Team-based pay plans normally reward all team members equally based on group outcomes.
These outcomes may be measured objectively or subjectively whether the criteria for defining
a desirable outcome are broad or narrow. As in individual-based programs, payments to team
members may be made in the form of a cash bonus or in the form of non-cash awards such as
trips, time off, or luxury items.

Team-based pay plans may include:

Gain sharing plan: where team/group performance is rewarded as a whole when the
organization gains as a result of the contribution of the group.

Profit sharing; where profit is shared by employees in an organization. Whatever the profit
of the organization is, the employees get a certain percentage in it.

Advantages of team-based-pay-for-performance plans

 They foster group cohesiveness.

 They aid performance measurement Disadvantages of team-based-pay-for-
performance plans
 Possible lack of fit with individualistic cultural values
 The free-riding effect
 Difficulties in identifying meaningful groups
 Inter-group competition leading to a decline in overall performance

Long term short term and pay administration issues

a) Long term deferred pay plan like GP fund, security, pension

b) Short term immediate salaries
c) Pay administration issues: Compensation administration is a segment
of management or human resource management focusing on planning, organizing,
and controlling the direct and indirect payments employees receive for the work they
perform.