Compensation Management

Meaning
It is the HRM function that deals with every type of reward individuals receive in exchange for performing organisational tasks. It is an exchange relationship. Types Financial Direct (Wages, salaries, bonuses, commissions) Indirect ( Vacation, insurance, childcare services)  Non Financial Rewards (Praise, Self- Esteem, Recognition)

Objectives
Adequate Equitable Balanced Cost- Effective Secure Incentive- providing Acceptable to the Employee -As suggested by Patton

Purpose of Compensation
Contribution based Remuneration Ensure Equity

Attract talent

Effective Compensation

Administratively Efficient

Institutionalized Processes
Motivate & Retain Staff Reward Valued Behavior

Legal Compliance

Factors affecting Wages and Salary

Demand and Supply of Labour Ability to Pay Trade Union Cost of Living Prevailing Wage Rates Job Requirements

The Labour Market Model

Demand of Workers Wages

Demand Workers Supply offor workers

Number of Qualified Workers

Number of Qualified Workers

Govt. Influences on Compensation Administration

Minimum Wages Act, 1948 Payment of Wages Act, 1936 Payment of Bonus Act, 1965 Workmen Compensation Act, 1923

Compensation Decisions
Employees working on similar jobs in other organisations (Group A) Employees working on different jobs within the organisation (Group B) Employees working on the same job within the organisation (Group C)

Group A
The Pay Level Decision
 High- Pay Strategy  Low- Pay Strategy  Comparable- Pay Strategy Choice of a Strategy- the degree to which the org can retain attract and retain -Organisations ability to pay

The Pay Survey

Group B
Job Evaluation
   

Job Ranking Classification Point System Factor Comparison

Pay Classes and Pay Curve

Establishment of Pay Structure

Wage Curves

Establishment of Pay Structure (contd.)

Wage Structure

Establishment of Pay Structure (contd.)

Delayering Broadbanding

Group C- The Individual Pay Decision

Method of Payment
 Time Worked (four types of increasesgeneral across the board for all employees, merit increases paid to some employees, COLA, Seniority)  Variable Pay- Incentive Compensation

Special Cases of Compensation

Incentive Compensation Plans
 Individual  Group  Organisation

PFP

Competency- based Compensation

I. Challenges to Incentive System

Do Only What You Get Paid For Syndrome Adversely affects cooperation Lack of Control Difficulties in Measuring Performance Psychological Contract is created that is often resistant to change Employees question fairness and credibility

Developing Incentive Systems

Use incentives as part of a larger plan Use financial and non-financial incentives Build employee trust Promote belief that performance matters Use multiple layers of rewards Increase employee involvement Link pay and performance appropriately

Pay-for-Performance Programs
Micro Level Macro Level

Individual Group Merit Pay Bonuses Awards

Plant Wide

Bonuses Scanlon Plan Awards IMPROSHARE Profit Sharing/ Gain-sharing

Piece rate

Effective Incentive Programs



 

  

 

The programs must be directed towards attaining specific goals Goals should be fair & easy to measure There should be room for improvement in productivity or performance The goals must be attainable Rewards must be substantial enough to encourage effort Increases in productivity & performance should be tied to other rewards such as advancement Rewards must be linked to output , not to time invested Rewards should be administered quickly to reinforce the reason for reward

Advantages of Incentive Programs

   

Retains Quality employees Increases productivity Reduces labour costs Increases employee focus on organizational objectives

Individual Incentive Programs

    

Piecework Incentive Programs Standard Hour Programs Commissions Bonus Plans Merit Pay

Individual-Based Incentive Plan: Advantages

Individuals are goal-oriented Financial incentives can shape goals Individual-based plans fit an individualistic culture Performance rewarded may be repeated

Individual-Based Incentive Plan: Disadvantages

Tying pay to goals promotes narrow focus Individual pay plans may work against achieving quality goals Individual-based programs may promote inflexibility

Individual-Based Plans Best When

contributions of individuals can be accurately isolated job demands autonomy cooperation is less critical to successful performance or when competition is to be encouraged

Group Incentive Programs

Motivational Plan provided to a group of employees based on the collective work. Bonuses Awards

GroupGroup-Based Incentive Plan: Advantages

Foster group cohesiveness Facilitates workforce flexibility Reliably measure Team performance

Group-Based Incentive Plan: Disadvantages

Free-ride effect Inter-group competition leads to decline in overall performance Social pressures limit performance Identifying meaningful groups difficult

Group-Based Plans Best When

it is difficult to single out who did what firms culture / structure support teams task objective fosters entrepreneurship in self-managed work groups

Plant Wide Incentives

Scanlon Plan- Focuses on cooperation between management and employees through sharing problems, goals, and ideas. IMPROSHARE- An incentive plan that uses a specific mathematical formula for determining employees bonuses. Profit Sharing/ Gain Sharing

Plant Wide Incentives Advantages

Financial flexibility for the firm Increased employee commitment Tax advantages

Profit-sharing (Corporate wide) Incentive Plans: Disadvantages

Suffer form Dilution Effect Risk tied to firm performance Limited effect on productivity

II. Competency- based Compensation

Recent extension of PFP. Rewards Skills, Knowledge and Behaviors. Broad Banding- Paying employees at preset levels based on their level of competency.

Executive Compensation Programs

Executive Compensation or managerial remuneration is how top executives of business corporations are paid Managers are very short in supply , therefore, organizations are competing with each other to attract , retain and motivate leader managers for their strategic requirement

Unique Features of Executive Compensation Programs

The base salaries of executives are almost 300 times higher than those of low level managers. Executive bonus and stock option plans can dramatically increase total compensation. Executives receive perquisites that others do not.