What is Compensation

Management?

Compensation Management, a basic

function of the Human Resource
Management, is administering the wage,
salary, benefits, and rewards of the
employees in the organizations.
Key concepts to discuss:
1. Difference between intrinsic and extrinsic
compensation
2. Concept of base pay
3. Concept of equity in compensation
4. Job Evaluation
5. Pay Structure
Kinds of Organizational Compensation

Organizational
Compensation

Extrinsic or
Intrinsic
Core Compensation
Compensation
 Intrinsic Compensation
•Intrinsic compensation includes all the
activities that have an impact on the intellectual,
emotional and physical well being of the
employee and is not specifically covered by the
extrinsic compensation system.
 Enhancing Dignity and Satisfaction from
Work Performed
Possibly the least costly and one of the most
powerful reward an organization can offer to
the employees is to recognize them as useful
and valuable contributors.

This kind of recognition leads to employee

feelings of self-worth and pride in making a
contribution.
Every compensation and non-compensation
reward component should carry with it the
message, “We need you and appreciate your
efforts.”
 Safe Working Conditions

Provision of safe equipment; a work

environment that is as risk-free as possible;
minimization of noxious fumes; avoidance of
extreme heat, cold, and humidity conditions;
and elimination of contact with radiation and
other disease-related materials are expected
by all employees.
 Promoting Constructive Social
Relationships with Co-workers
In this world of extreme specialization,
people need and rely on other people more
than ever.
A workplace environment where trust,
fellowship, loyalty, and love emanate from
the top level of management to the lowest
levels of the organization promotes the kind
of social interaction most people need in order
to thrive.
So, one of the inexpensive but most valued
rewards offered through working is the
opportunity to the employees to interact in a
socially constructive manner with other
people to enjoy the comradeship of workplace
associates.
 Designing Jobs that Require Adequate
Attention & Effort
As against “Scientific Management”, new
approaches to improve the quality-of-work-
life are needed.

Employees need to have more voice in how

their jobs should be structured and performed.
Restructuring of job tasks and flexibility in
job requirements through rotating the work
assignments and by giving employees more
opportunity to perform their assignments in
their own ways, are among the non-
compensation rewards that are believed to
enhance the output as well.
 Allocating Sufficient Resources to Perform
Work Assignments
To make work satisfying, employees must not be
placed in a no-win situation.
To produce certain kinds and quantities of output,
they must be provided with sufficient resources.
Management must be careful about:
Does the employee have the time to perform the
assignment?
Are the necessary human, technical, or physical resources
available to them?
Has the organization assisted the employee to gain the
knowledge and skill necessary to perform the assignment?
Providing the Career Growth
Itis responsibility of the organization to
provide the employees clear career paths
and enhance their employability.
 Extrinsic Compensation
Total Compensation package

Base Wage & Salary Deferred Services & Pay for

Pay Add-ons Payment work not
Benefits
Overtime done
Shift differentials Pension Plans Accommodation
Premium payment
for working on Medical
holidays EOBI pensions Facilities
& weekends Group
Insurance
Burdensome, distasteful, Savings & Thrift
hazardous work Plan Conveyance
(Radiation, fumes,
dust, excessive heat/cold, Supplemental Social Security
noxious odors) Income Plan Support
Incentive Payments Others Others
 Base Pay

Base pay is recurring, that is, employee will continue to

receive as long as they remain in their jobs.

Companies disburse base pay to employees either in the

form of hourly pay for each hour worked or in the form of
salaries earned for performing jobs on weekly, monthly or
annual basis, regardless of the actual number of hours
worked.
 Determinants of the Base Pay

1.Kinds and level of required knowledge and

skill
No one single factor carrier greater
significance than the current level of
knowledge, skills and abilities (KSAs) required
of the job-holder to perform a particular job.

Higher the level of possessed KSAs higher the

pay level and the vice versa.
2. Employee seniority and experience
It is not unusual to find very senior
employees being paid double the amount
received by a new employee for comparable
jobs.

This is because employers frequently find

more senior employees to be more
dependable and predictable.
3. Supply and demand of particular
skill
 Even in times of high unemployment,
individuals with certain sets of skills or
abilities are in demand.
 Jobs in high demand are frequently called
“exotic” jobs, and those who have the
necessary skills can demand and will
receive premium wages.
4. Public vs. Private Sector
 Being with profit orientation, private-sector
businesses offer higher rates of pay than those in
the public sector.

 Similarly, within the private sector, profit

organizations pay far more than nonprofit
organizations.
5. Capital intensive Vs labor intensive
business
Labor-intensive industries require the
employment of larger numbers of low-
skilled laborers against relatively lower pay
rates.
Conversely, as businesses become more
capital-intensive, using newer and more
sophisticated technology and processes, they
require fewer but highly skilled employees
against heavy emoluments.
6. Size of business

 Large businesses quite often provide higher

wage rates than smaller businesses.
7. Company Strategy
Growth Strategy
 Companies in growth mode adopt differentiation
strategies to develop products or services that are
unique from those of its competitors.

 Such firms would focus on employee performance with

emphasis on creativity, innovation, risk taking to win
competitive advantage over the rivals.

 Compensation practices in such organizations are

employed to contribute to such competitive advantage
through promoting more productive and highly skilled
workforces by providing them with the opportunity for
high earnings.
 Cost Effective Strategy
Firms following cost effective strategy, on the other
hand, focus on gaining competitive advantage by
being the lowest cost producer of a good or service
within the marketplace.

Since, their focus is more on survival than on

external competitiveness and require just
maintenance of the current skills that exist in it, they
prefer comparatively less qualified but cheap
workforce .
8. Profitability of the firm
 Employees working for highly-profitable
businesses have a greater chance of receiving
higher wages than those working for less
profitable firms.
 Base Pay Adjustments

Job Based Person Based

Adjustments Adjustments
COLAs

Seniority based Skill-based Pay

adjustment
Merit based
adjustment
 Seniority based adjustment
This system of pay rewards employees with periodic
additions to base pay according to employees’
lengths of service.

Under this system, employees receive automatic pay

raise based on number of years they have been with
the organizations, which is a permanent addition to
their current pay levels.

Today all government and public sector

organizations and most of the unionized private
sector companies base salary on seniority or length
of employee service.
Pay plans under this system assume that employees
become more valuable to companies with time, and
that valued employees will leave if they do not have
a clear idea that their wages will progress over time.

Furthermore, over time, employees presumably

refine existing skills and acquire new ones that
enable them to work more productively. Thus,
seniority pay rewards employees for acquiring and
refining their skills as indexed by length of
employment.
 Advantages Of Seniority Pay

1. Seniority stands in contrast to subjective standards

based on supervisory judgment. The inherent
objectivity of seniority pay systems should lead to
greater cooperation among coworkers.
2. Employees are likely to perceive they are treated
fairly because they earn pay increases according
to seniority, which is an objective standard.
3. Hence, employers are less likely to offend the
employees on pretext of favoritism to others,
contributing towards healthy environment.
4. Seniority pay facilitates the administration
of pay programs. Pay increase amounts
are set in advance, and employers award
raises according to a pay schedule, much
like the Federal Government’s General
Schedule.
Disadvantages of the Seniority pay
Seniority pay constitutes system-wide reward and
employees can count on receiving the same pay
raises for average as well as an exemplary
performance.
It does not offer any motivational force for the low
producers to perform better nor it floats any
encouraging message for the high-fliers and rate
busters.
Rather, conversely, it could be a source of
displeasure for the latter owing to the element of
perceived inequity. This fact represents the greatest
disadvantage of seniority pay systems.
 Merit based Adjustment
 Merit pay programs assume that employees’
compensation over time should be determined, at least in
part, by differences in job performance.

 The pay raise based on performance rewards excellent

effort or results, motivates future performance, and helps
employers retain valued employees.

 Merit pay programs occur most often in the private “for-

profit” sector of the economy rather than in the public
sector organizations such as local and state governments.
Skill based adjustment
Concept of Equity in Compensation

The concept of equity refers to a comparison of a

ratio of outcomes to inputs of a person on the job
with the ratio of outcomes to inputs of a comparison
person or generally called referent other.

The comparison person may be another person on

the same job engaged in direct exchange to the
individual, a member of the same occupation, or
even some composite of several comparison persons.
 Two important aspects relating to equity
should be recognized.
1. The conditions necessary to produce equity or
inequity are based on the individual’s perception of
inputs and outputs vis-à-vis those of referent others.
The objective characteristics of the situation are of
less importance than the individual’s perception.

2. Inequity is a relative phenomenon. Same amount

received can be a source of satisfaction in one
situation and a source of dissatisfaction in the other.
Magnitude of equity in compensation
No factor has a greater effect on emotional
reactions of employees than perception of
fairness and equity.
The experience of inequity is very distressing and
people will try several strategies for bringing the
ratios back into alignment.
◦ Adjusting ones inputs (putting in lesser efforts).
◦ Adjusting one’s outputs (resorting to unfair means of
output).
◦ Changing the comparison person
◦ Leaving the situation
 Types of Equity

Inter-person Equity
Intra-person Equity
 Inter-person Equity

Inter-person equity is said to exist whenever

the ratio of person’s outcomes to inputs is
equal to the ratio of outcomes to inputs of
referent others.
Os Oo
----- = -----
Is Io
Inter-person inequity exists whenever two ratios
are unequal
Os Oo
----- < ----- Inequity, under reward
Is Io

Or

Os Oo
----- > ----- Inequity, over reward
Is Io
 Inter-person equity Model
Education Perceived
Training personal job inputs
Skills
Experience
Age Perceived amount that
Present should be received
performance Perceived input of (a)
referent others
Level of
difficulty a=b satisfaction
Time span Perceived job a>b dissatisfaction
Amount of characteristics a<b guilt, discomfort,
responsibility more effort

Actual pay
received
Perceived pay received
Perceived pay relative to others
of referent b
others
Different dimensions of Inter-person Equity
Inter-person equity has two dimensions:
◦ External Equity – how fairly one is being
treated vis-à-vis the market rates. External
equity can be realised through market surveys.
◦ Internal Equity – how fairly one is being
paid vis-à-vis different internal parallel jobs.
Internal equity can be realised through job
evaluation.
 Intra-person Equity
Intra-person equity warrants a balance among
different factors and aspects relating to the job that
determine the level of the job assignment.

The debate is based on the following propositions.

◦ Every worker is endowed with a specific level of capacity
for work (C). This capacity varies across people.
◦ Each job to be performed demands a specific level of
capacity (W).
◦ Every job has a rate of pay that is fair to be paid for that
job. It corresponds to each job’s demand to get performed
(P).
So equity will prevail if the demands of
the job, capacity of the individual to
perform that job and pay level are in
harmony.

C --------------- W -------------- P
 Reasons of intra-person inequity
Conversely, as shown in the following diagram, a
variety of ways that inequity can develop.

W C P

1. C P 3. W P 5. W C

2. C P 4. W P 6. W C

W C P
Implications of the concept of Intra-person
Equity for Recruitment and Selection
People can be assigned to jobs that do not
correspond to their capacities.
Wages can be set that do not correspond to
the level of work the job demands.
Wages can be set that correspond to the level
of work demanded by a job but not to the
individual’s capacity for work.
 Discussion Questions
1. Define the term Intrinsic Compensation. Why it
is as much important as core compensation?
Discuss various job and environment related
factors that constitute the package of intrinsic
compensation.
2. Describe the concept of equity in Compensation
with all its aspects. Why this concept is crucial
for the Compensation Managers?
3. Define inter-person equity. With the help of a
model explain how an individual reaches a
perceptual conclusion regarding inter-person
equity?
 Define and explain the concept of job related
intra-person equity. What recruitment and
placement related conclusions the discussion on
intra-person equity leads to?
5. Define base pay. What are main determinants
of base pay?
6. Define seniority based adjustment in base
pay. What are merits and demerits of such
adjustment?