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 Dr. Gunjan Mathur

Learning objectives
 Understand the concept of
Compensation Management
 Explore the role of compensation in
Compensation Management
 Compensation Management is an integral
part of the management of the
 Compensation is a systematic approach to
providing monetary value to employees in
exchange for work performed. It may
achieve several purposes assisting in
recruitment, job performance, and job
Compensation management
 Compensation
management, also known
as wage and salary
management, or reward
management, is
concerned with designing
and implementing total
compensation package.
Factors influencing Compensation
 The factors influencing compensation management are broken into two
categories: Internal and External

 Corporate mission
 Business strategy
 Corporate culture and philosphy
 Costs/resource availability

 Competition
 Industry characteristics
 Legal
 Globalization
 According to Robbins “Compensation
management is a process of
determining cost effective pay
structure, designed to attract and
retain, provide an incentive to work
hard, and structures to ensure that
pay levels are perceived as fair.”
Principles of Compensation

Non Legal
Ability to pay
Ability to pay discriminatory compliance

Simple and
Equity Principles flexible
considerations Of compensation
Performance development
Need of Compensation Management
 A good compensation package is important to motivate the employees to
increase the organizational productivity.

 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.

 The most competitive compensation will help the organization to attract

and sustain the best talent. The compensation package should be as per
industry standards.


 It is the remuneration
received by an employee in
return for his/her
contribution to the
 It is an organized practice
that involves balancing the
work-employee relation by
providing monetary and
non-monetary benefits to
 Cascio has defined compensation as
 "Compensation includes direct cash

payments, indirect payments in the

form of employee benefits and
incentives to motivate employees to
strive for higher levels of
 Compensation may be viewed as
 (a) a system of rewards that motivates
employees to perform
 (b) a tool used by organisations to
foster the values, culture and the
behavior they require and
 (c) an instrument that enables
organizations to achieve their business
 Compensation is a primary motivator
for employees. People look for jobs
that not only suit their creativity and
talents, but compensate them—both in
terms of salary and other benefits—
 Compensation is also one of the fastest
changing fields in Human Resources,
as companies continue to investigate
various ways of rewarding employees
for performance.
Components of total Reward
 + Recognition
Career opp
Base pay Quality of
FinancialContingent pay Total Non
rewards Variable pay remu + Finan work life Total
And Neration Meaningful reward
Share cial
benefits Work
benefits Opportunity
To use
develop skills
Hourly Wages
Monetary Bonuses
Rewards Commissions
Pay Incentives
Rewards Insurance
Compensation Paid Vacations
of Benefits Food Services
Employees Credit Union

Intrinsic Promotion Opportunities
Rewards Working Conditions
Interesting Work
Compensation may be used to

 Recruit and retain qualified employees.

 Increase or maintain morale/satisfaction.
 Reward and encourage peak performance.
 Achieve internal and external equity.
 Reduce turnover and encourage company
 Modify (through negotiations) practices of
 Need for compensation
Purpose of compensation
Contribution based  Ensure Equity

Attract talent Effective  Administratively 

Compensation Efficient Legal 
Institutionalized  Compliance 
Motivate & 
Retain Staff Reward Valued 
Objectives of Effective
Compensation Management
Objectives of Effective
Compensation Management
 The “Big Three”
 Attract qualified employment
 Retain qualified employees, while
discouraging retention of low
 Motivate employee behavior toward
organization objectives
Objectives of Effective
Compensation Management
 Ensure Equity
 Reward Desired Behavior
 Control Costs
 Comply With Legal Regulations
 Facilitate Understanding
Objectives of Effective
Compensation Management
 Achieve external competitiveness
 Support organization priorities
 Strategy and goals
 Culture and values
 Easy to administer
Compensation Strategy
 Compensation
Strategy – defines
the intentions of the
organization on
reward policies,
processes and
practices required
to ensure that it has
the skilled,
competent and
workforce it needs
to achieve its
business goals
The Pay Model
Business Goals
activities serve

Business Objectives

Compensation strategy
HR Head

Compensation is periodically
Strategy reevaluated and the
Org.Structure Non-Financial
Compensation plan
periodically developed

 A strategic perspective on compensation takes the

position that how employees are compensated can
be a source of sustainable competitive advantage
Approaches of
compensation management

 There are 3P approach of developing a

compensation policy centered on the fundamentals
of paying for
 Position,
 Person and
 Performance.
 The management of any organization considers
three parameters while deciding the salary as well
as incentives
 Pay for position
 Broad banding
 Through broad banding the traditional narrowly
structured pay grades generally determined through
job evaluation are replaced by fewer and wider
bands, and a grading structure is created.
Broad Banding

 It is a compensation technique that reduces

many different compensation categories to
several broad compensation bands. A banding
procedure takes place when jobs are grouped
together by common characteristics
Broad Banding

 On recruitment or promotion, employee

compensation may be set at levels in the
broadband deemed to be appropriate to an
employee’s qualifications, education,
training and experience. Employees typically
progress up through the broad band if their
performance ratings are good, rather than
progressing up through a grade by steps based
on time in the grade.
Pay grades to broad bands
Traditional Grades Broad Bands

Range 40% to 75%


Types/Pay •Jobfor person
evaluation based grade
Options assignments
 Pay for person takes into account, a person’s
Structure Pay Range Band
capabilities and experienceBand
Grade 4

Grade 3
in setting
2 RS 18,000–
a pay Technical
level that is both equitable and competitive.
Grade 2
RS 14,000 –
Band 1
Works concerned
Grade 1
with market demands of
a Support
•Emphasis is on length of •Emphasis is on linking
unique skills and
service, with the possibility of experience.
competency development to
performance pay pay
 It is•Seen
Key Issues based on competency
as bureaucratic based pay.
Include •Predictable. Relatively easy to •Ensuring line manager
administer and budget readiness and skills
Case •Organization flexibility critical
to success; increase in
competencies critical to success
Pay for Person
 Pay for person takes into account a person’s
capabilities and experience in setting a pay
level that is both equitable and competitive. It
also considers the market demand of a person’s
unique skills and experience.
 Pay for person is associated with competency
based pay. It also incorporates market based
pay approach.
 Pay for performance
 An individual’s performance is managed
through a performance contract which
comprises the clarification of the role, the
setting up of objectives, and the review of
performance. As an outcome a measure of
performance at the corporate, unit and
individual level becomes the basis for
setting the performance pay.
Components of
 Basic wages/Salaries:-
 These refer to the cash component of the
wage structure based on which other
elements of compensation may be
structured. It is normally a fixed amount
which is subject to changes based on
annual increments or subject to periodical
pay hikes.
 Wages represent hourly rates of pay, and
salary refers to the monthly rate of pay,
irrespective of the number of hours put in
by the employee.
Components of compensation
 Concept of wages
 Payment made to labor is generally
referred to as wages. It can be time
rated or piece rated. It can be rate
per hour , per day, per week, month
or year. In price rated system it can
be completion of job task and wages
fixed for per unit of performance.
Concept of salary
 Money paid periodically to persons whose
output can not easily be measured like
managerial staff is referred to as salary.
Basic pay is generally practiced through
scales of pay. Employee draws his basic
pay in a range provided in the scales. He
also get increment on periodical basis.
Basic pay generally remain static, unless an
employee moves upward (gets promotion)
or downwards (gets demotion)
Dearness Allowance
 The words Dearness Allowance suggest and
refer to allowance paid to employees in
order to enable them to face the increasing
dearness of essential commodities.
 Instead of increasing wages D.A is paid to
neutralize the rise in prices. The payment
of dearness allowance, which may be a
fixed percentage on the basic wage,
enables the employees to face the
increasing prices.
 DA forms a variable component of
pay packet since rate of dearness
increases more than once every year,
whereas the basic pay scales are
revised after long spells of time.
 Perquisites:
 These are normally provided to managerial
personnel either to facilitate their job
performance or to retain them in the
 Such perquisites include company car, club
membership, free residential
accommodation, paid holiday trips, stock
options, etc.
 Incentives:-
 Incentives are paid in addition to wages and
salaries and are also called ‘payments by
results’. Incentives depend upon
productivity, sales, profit, or cost reduction
efforts. There are: (a) Individual incentive
schemes, and (b) Group incentive programs.
 Individual incentives are applicable to
specific employee performance. Where a
given task demands group efforts for
completion, incentives are paid to the group
as a whole. The amount is later divided
among group members on an equitable
 Bonus:-
 The bonus can be paid in different
ways. It can be fixed percentage on
the basic wage paid annually or in
proportion to the profitability. The
Government also prescribes a
minimum statutory bonus for all
employees and workers. There is also
a bonus plan which compensates the
Managers and employees based on the
sales revenue or Profit margin
 Commissions:-
 Commission to Managers and employees
may be based on the sales revenue or
profits of the company. It is always a fixed
percentage on the target achieved. For
taxation purposes, commission is a taxable
component of compensation. The payment
of commission as a component of
commission is practiced heavily on target
based sales. Depending upon the targets
achieved, companies may pay a
commission on a monthly or periodical
 Mixed plans:-
 Companies may also pay employees and
others a combination of pay as well as
commissions. This plan is called
combination or mixed plan. Apart from the
salaries paid, the employees may be
eligible for a fixed percentage of
commission upon achievement of fixed
target of sales or profits or Performance
objectives. Nowadays, most of the
corporate sector is following this practice.
This is also termed as variable component
of compensation.
 Piece rate wages:-
 Piece rate wages are prevalent in the
manufacturing wages. The laborers are paid
wages for each of the Quantity produced by
them. The gross earnings of the labor
would be equivalent to number of goods
produced by them. Piece rate wages
improves productivity and is an absolute
measurement of productivity to wage
structure. The fairness of compensation is
totally based on the productivity and not by
other qualitative factors.
 Fringe benefits:-
 Fringe benefits may be defined as wide
range of benefits and services that
employees receive as an integral part of
their total compensation package. They are
based on critical job factors and
performance. Fringe benefits constitute
indirect compensation as they are usually
extended as a condition of employment and
not directly related to performance of
concerned employee.
Fringe benefits
 Compensatory city allowance
 House rent allowance
 Leave travel concession
 Provident fund
 Medical benefits
 Accident and death compensation while on
 Educational allowance
 Travel/Meal/Housing Allowance
 Benefits including: dental, insurance,
medical, vacation, leaves, retirement,
 Fringe benefits are supplements to regular
wages received by the workers at a cost of
employers. They include benefits such as
paid vacation, pension, health and insurance
plans, etc. Such benefits are computable in
terms of money and the amount of benefit is
generally not predetermined.
 The purpose of fringe benefits is to retain
efficient and capable people in the
organization over a long period. They foster
loyalty and acts as a security base for the
 Profit Sharing: -
 Profit-sharing is regarded as a steppingstone to
industrial democracy. Profit-sharing is an agreement by
which employees receive a share, fixed in advance of
the profits.

 Profit-sharing usually involves the determination of an

organization's profit at the end of the fiscal year and
the distribution of a percentage of the profits to the
workers qualified to share in the earnings. The
percentage to be shared by the workers is often
predetermined at the beginning of the work period and
IS often communicated to the workers so that they
have some knowledge of their potential gains.
 To enable the workers to participate
in profit-sharing, they are required to
work for certain number of years and
develop some seniority. The theory
behind profit-sharing is that
management feels its workers will
fulfill their responsibilities more
diligently if they realize that their
efforts may result in higher profits,
which will be returned to the workers
through profit-sharing.
 The whole idea of compensation
management can be better
understood through the following
Pyramid structure.
 Non-monetary benefits:-
 These benefits give psychological
satisfaction to employees even when
financial benefit is not available. Such
benefits are: (a) Recognition of merit
through certificate, etc. (b) Offering
challenging job responsibilities, (c)
Promoting growth prospects, (d)
Comfortable working conditions, (e)
Competent supervision, and (f) Job
sharing and flexi-time.