Compensation and benefits management

Compensation and Benefits Management

Compensation

• Often tied to perceptions of quality of life, security, status, workplace value and fairness.

• Refers to all forms of financial returns and tangible services and benefit employees receive in the course of employment.

Employee benefits•  Benefits in kind (also called fringe benefits, perquisites,

or perks) include various types of non-wage compensation provided to employees in addition to their normal wages or salaries. • In instances where an employee exchanges (cash) wages

for some other form of benefit is generally referred to as a 'salary packaging' or 'salary exchange' arrangement.

Objectives of Compensation and Benefits System

a. To attract competent employees to the organization, to motivate and to retain them.

b. To align the compensation system with the organization’s goals and objectives.

c. To control costs and to maintain the company in a reasonably competitive position.

d. To promote and maintain good employee relations by maintaining fairness in its compensation system.

e. e. To comply with legal requirements.

I. Theoretical Basesa. H. Leibenstein’s X-Efficiency Theory

contributed to the development of incentive pay systems such as gain-sharing and paying of bonuses designed to provide a basis for productivity improvements.

b. Agency Theory

provides a basis for many pay strategies for organization leaders and senior management today.

c. Herzberg’ Motivation Hygiene Theory

postulates that pay does not motivate an employee.

d. Vroom’s Expectancy Theory

states that motivation is a product of 3 factors:

Expectancy – an employee’s assessment of his/her ability to perform certain tasks successfully.

Instrumentality – an employee’s belief that completion of the task will be rewarded by the organization.

Valence – an employee’s assessment of the value of the rewards that he/she will receive upon

completion of the task.

e. Adam’s Equity Theory

postulates that employees are motivated when perceived outputs such as pay or incentives are equal to perceived inputs

II. Factors Affecting the Design of a Compensation System

a. Financial Capability of the Company

one should assess the implications of a compensation system on the company’s financial condition to ensure that it is in line with the company’s financial health

b. The Company’s Corporate Philosophy

Will salary be based on longevity of employment, performance, competency or some other criteria?

c. The Economic Conditions in the Community

Are the economic conditions ripe and favorable for the organization’s business?

d. Laws and Government Regulations

various laws and regulations affecting salaries and wages have to be considered in designing a compensation system.

e. Labor Market Conditions

supply and demand of certain types of talent required to run an organization’s business greatly influence the pay rates that it establishes.

f. Collective Bargaining Agreements

stipulate pay rates, pay increases, and employee benefits.

III. Alignment Issues

a. Internal Alignment

managers or HR practitioners attempt to establish internal alignment by creating a hierarchy of jobs, a pay structure, and pay mix reflecting the value of jobs to the organization.

b. External Competitiveness

refers to how an organization’s pay level and pay mix compare with those of the other organizations in the relevant market.

IV. Developing a Compensation Structure

a. Job-Based ApproachSTEPS IN DEVELOPING A COMPENSATION STRUCTURE USING THE JOB-BASED METHOD

Job Analysis

Job Description Preparation

Creation of Job Levels/Grades

Determining Pay Rates for Each Level Adjusting Pay Structure

1. Job Analysis

first step in designing a pay structure. This process identifies:

specific activities performed in the jobResponsibilities and accountabilities of the

incumbentExpected results of the activities performed

2. Job Description Preparation

a job description usually consists of the following:Job titleStatements of duties and responsibilities to be

performed by the incumbent on the jobReporting relationships.

3. Job Evaluation

establish pay differentials among jobs in an organization.

V. Job Evaluation Methods

• Non-quantitative methods – job as a whole is compared to other jobs to determine its worth in the organization.

Ranking methodPosition classification method

• Quantitative methods – job is broken down into its distinct characteristics (factors), assigned values and weights, and evaluated in a previously set standard rating scale.

Point system Factor comparison system

A. Non-Quantitative Methods of Job Evaluation

1. Ranking Method

- Obtain job analysis information

- Select raters and jobs to be ranked

- Rank jobs according to overall difficulty or importance

- Combine and average rankings for each job across raters

2. The Position Classification Method

Is a process of grouping jobs by comparing each job against a rating scale comprising several job grades.

3. Market Pricing Method

Uses the pay rates in the labor market to determine the value of each job and the rate of pay to be assigned to jobs.

B. Quantitative Methods

1. The Point System

-This method involves the selection of a number of dimensions or factors to be used in evaluating the relative worth of a set of jobs.

2. The Factor Comparison Method

-Requires a breakdown of each job into compensable factors which are assumed to be present in jobs.

Five factors used in comparing jobs

Skills Mental requirementsPhysical effortsResponsibilityWorking conditions

VI. Developing a Compensation Structure-Person –Based Approach

A. Skill-based Pay Method

- Typically uses a skill matrix, consisting of skill blocks . The horizontal axis on the matrix could include important functions in the organization while the vertical axis may include the skill levels for each function.

Skill Matrixes for Skill-Based Pay System

Skill Categories/ Functions

LEVEL/DEPTH OF SKILLS

PROCESS OPERATOR

QUALITY CONTROL

PACKAGING MAINTENANCE

Advanced 1-3 2-3 3-3 4-3

Intermediate 1-2 2-2 3-2 4-2

Entry 1-1 2-1 3-1 4-1

• B. Competency-based Pay Method-Uses a list of employee competencies, habits, skills,

traits, behaviors and values.

Five areas of competencies: Skills- demonstration of expertise. Knowledge- accumulated information. Self concepts- attitudes, values, self image. Traits- general disposition to behave in a certain way. Motives- recurrent thoughts that drive behaviors.

VII. Employee Benefits

A. Employee Benefits Planning

1. Value of the employee benefits to the employer and to the employee.

- In designing the benefits package, it is important for the HR planners to align the benefits with the organization’s goals and objectives

2. Fair and equitable administration of benefits- The Equity Theory of management suggests that it is

important for employees to perceive fairness in the organization’s incentives, pay or benefits programs.

3. Financial capability of the company- The company must be able to pay for the cost of the benefits

not only at the present time but also in the long term.

4. Eligibility

- It is important to determine who will be eligible for employee benefits.

5. Employee awareness of the cost of benefits- To better appreciate their employee benefits, employees

should be made to realize how much the company is spending to provide them with fringe benefits and services.

6. Employee Participation

-Employee sharing in the cost of some benefits should be adopted.

Statutory Benefits

o  The Philippine Government has declared it as a matter of policy to extend social security protection to workers and their beneficiaries against the hazards of disability, sickness, maternity, old age, death and other contingencies during one’s employment which may result in loss of income or financial burden.

o The Labor Code of the Philippines (PD 442) is also good source of legally mandated employee benefits. Among these are:

a) holiday pay

b) premium pay

c) night shift pay

d) overtime pay

e) 5 days incentive leave after one year of service

f) service charges or tips;

g) separation pay of one month or one-half month salary for every year of service owing to any of the authorized causes of termination of employees.

o All employees regardless of their position, designation or status, and irrespective of the method by which their wages are paid are entitled to retirement benefits provided under RA 7641 upon compulsory retirement at the age of 65 or upon optional retirement at 60 or more but not 65. The minimum retirement pay is equivalent to one-half month salary for every year of service.

• Employees are also given the a.) 13th month pay which shall not be less than 1/12 of the total basic salary earned by an employee within a calendar year (PD 851); b.) paternity leave of 7 days for the 1st 4 deliveries of the legitimate spouse with whom the male employee is cohabiting (RA 8187); and c.) solo parental leave of 7 days. (RA 8972).

Non-statutory Benefits

o  The types of non-statutory benefits granted to employees vary form company to company.

1. Medical & dental benefits

- Most companies have an in-house medical and dental clinic with full- time and part-time physicians and dentists for emergency treatment, and consultation.

2. Life/Accident Insurance

- Some companies provide life and accidental death and dismemberment insurance for their employees at no extra cost to the latter.

3. Leave privileges

- Paid leave enjoyed by most employees includes vacation, sick, bereavement, emergencies, birthday, wedding or nuptial leave, union leave, sabbatical leave, court appearance, and study leave.

4. Scholarship grants and training

- In some org., employees are given the opportunity for professional growth and development.

5. Bonuses and profit-sharing

- Bonuses are often given to employees. These include Christmas bonus, mid-year bonus, and quarterly bonus or performance of productivity bonus. Profit sharing plan is an incentive system in which some portion of an organization’s profits are given to employees to boost their morale and to motivate them to contribute to the organization’s productivity and profitability.

6. Service or loyalty awards

- An employee is given recognition through a loyalty or service award with corresponding cash incentive for length of employment in the org.

VIII. Current Trends In Compensation Management

A.  Broadbanding  -   Together with the emergence of person-based approaches to designing pay structures, broadbanding was introduced in response to the organization’s needs for a more flexible compensation system.

B. Variable Pay System

- Another innovation in compensation management is the variable pay programs. Although variable pay plans have been in existence for some decades, the innovations is in the introduction of new bases for paying incentives such as pay-for-knowledge or pay-for-performance programs.

IX. Global Implications of Compensation and Benefits Management

o  Developing and implementing compensation programs in a global setting pose significant challenges to an HR practitioner. HR needs incentives to encourage employees to be uprooted from their home countries to take foreign assignments. HR practitioners need to design programs that promote smooth transition from home country to host country and repatriation after completing the foreign assignment.

There are three types of employees in global businesses:

Host country nationals- they are citizens of the host country, employed by a global company or multinational corporation to work in the host country.

Third country nationals- they are citizens of countries other than the parent company, or the host country can be located anywhere in the world.

Expatriates- they are citizens of the parent company’s country assigned to work in a foreign location.

o The scarcity of required talent and competencies in the global market place is another challenge that multinational corporations experience. Compensation has to be adjusted to ensure organization’s ability to compete for needed talent. Designing a compensation system that maintains internal and external equity in a tight labor market is a real issue for HR compensation managers. A new concept in international compensation is the strategic flexibility approach to international compensation developed by Milkovich and Bloom (1998)

 These flexible models consists of monetary as well as non-monetary components:

Core set model- represents the organization’s global mindset.

Crafted set model- each subsidiary or business unit must be able to choose from components (or options) of a total compensation package, and meet local needs to gain and sustain competitive advantage.

Choice- flexibility is offered to employees who can choose from various options in total compensation within a total cost framework (Fenwick, 2004).

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