Role of Compensation in Organisations UNIT 1
Nov 18, 2014
Role of Compensation in OrganisationsUNIT 1
Objective
REWARD FOR PAST SERVICE TO STIMULATE EVEN BETTER
PERFORMANCE IN FUTURE
An Effective tool to develop, build and maintain “human capital” for competitive advantage
Economic & Behavioral Theories
REWARDS INFLUENCE BEHAVIOR REINFORCEMENT THEORY REWARDS TO BE EQUITABLE REWARDS SHOULD BE OF VALUE TO
EMPLOYEE DUAL FACTOR THEORY OF JOB
SATISFACTION / MOTIVATION –COMBINATION OF EXTRINSIC & INTRINSIC REWARDS
REWARDS INFLUENCE BEHAVIOR NOT TO FORGET THAT PAY IS IMPORTANT
TO INDIVIDUALS & HAS THE POWER TO INFLUENCE MEMBERSHIP BEHAVIOR
EXPECTANCY THEORY MISCONCEPTION THAT REWARDS OF
OTHERS A SOURCE OF DISSATISFACTION OVERALL SATISFACTION IS A RESULT OF A
MIX OF REWARDS
TOP FIVE WORK VALUESRANRANKK
MANAGERSMANAGERS PROFESSIONAPROFESSIONALL
CLERICALCLERICAL HOURLYHOURLY
1 Pay Benefits
Advancement Pay Benefits
Pay Benefits
2 Advancement
Pay Benefits Advancement
Security
3 Authority Challenge Supervision
Respect
4 Accomplishment
New Skills Respect Supervision
5 Challenge Supervision Security Advancement
Economic Theories
1.Subsistencetheory
Compensation
2. Wage FundTheory
3.Residual Claimant Theory
“Social wage “Theories-Classical
Ricardo Adam Smith Walker
4. Marxian Theory Macro Theories
Micro Theories
Micro & Macro Theories
Justification theories
Behavioraltheories
5.Marginal ProductivityTheories
6.BargainingTheory
7.Supply & DemandTheory
8. CompetitiveTheory
9.Employee’sAcceptancelevel
10.Internal Wage Theory
Wage &Motivators
WAGE THEORIESWAGE THEORIES
3.Behavioral 3.Behavioral TheoriesTheories
COMPENSATIONCOMPENSATION
Subsistence theory
Bargaining Theory
Marginal Productivity
Theory
Marxian Theory
Residual Claimant Theory
Wage fund Theory
Employee’s Acceptance
Level
Competitive Theory
Supply and Demand
Theory
Wage and Motivators
InternalWage
Structure
1.’’Social 1.’’Social Wage Theories Wage Theories (classical)(classical)
2.’’Justification’’ 2.’’Justification’’ Theories Theories
Macro Macro TheoriesTheories
Micro Micro TheoriesTheories
Micro-Micro-Macro Macro TheoriesTheories
Motivation Theories
Alderfer’s 3 level(ERG)
McClelland’s 3 modes of success
Herzberg’s 2 factor
Maslow’s hierarchyPhysiological
Safety & security
Belongingness
Esteem
Self Actualisation
Hygiene factors Motivators
n Achievement n Power n Affiliation
Existence Relatedness Growth
CONTENT Theories
Process Theories
Vroom’s Expectancy theory
Equity Theory Locke ‘s Goal setting
M= ExUxI
Effort Valence Outcome
Comparisons in work situation
Strategic perspectives
In this session….
We’ll examine the relationship between organizational strategy and compensation strategy
We’ll begin to think about different factors that might influence compensation strategy
Organizational Strategy There are several approaches
organizations take when developing overall strategy, e.g., High cost, low volume Low cost, high volume
Choice of strategy depends on industry, geographic location, organizational size, nature of competition, etc.
HR Strategic Alignment
COMPETITIVE ADVANTAGE THROUGH PEOPLE -HOW?????
Human resource add value to bottom-line Hiring Skills, knowledge, abilities –
competitive advantage Competencies difficult to imitate Collective Collative team synergy-
organised effort
COMPETITIVE CHALLENGES & HRM
Going global-diff geographies, cultures, laws & business practices, identifying expatriate managers,HCN,PCN,TCN
Embracing New Technology-virtual organisations, from touch labor to knowledge workers,HRIS
Managing change-HR issues ( lack of sense of urgency,cohesive coalition,leadership, communication, human mindset resistance, not anchoring to corporate culture)
COMPETITIVE CHALLENGES & HRM
Developing Human Capital-(differentiate bet HR & HC)
Responding to the market-TQM, Outsourcing & Employee Leasing, Productivity Enhancements
SOCIAL ISSUES IN HRM
Demographic changes-Diversity, age distribution, gender distribution,rising levels of education,cultural changes (employee rights, concern for privacy,changing attitudes, work life balance
THE HUMAN RESOURCES APPROACH TO MANAGEMENT
EMPLOYEE MOTIVATION APPLIED ABILITY
QUALITY, QUANTITY OF WORK
ORGANISATIONAL PRODUCTIVITY & PROFITSEMPLOYEE
REWARDS & RECOGNITION
HUMAN RESOURCE AREAS
Outputs
•Quality work life
•Productivity
•Readiness for change
SELECTION &STAFFING
PERSONNEL RESEARCH & INFORMATION SYSTEMS
HUMAN RESOURCES PLANNING
ORGANISATION DESIGN
ORGANISATION DEVELOPMENT
TRAINING & DEVELOMENT
EMPLOYEE RELATIONS-LABOUR-UNION
EMPLOYEE ASSISTAMCE
COMPENSATION BENEFITS
REWARD STRATEGIES
REWARD PRINCIPLES
STRATEGY DRIVEN PERFORMANCE BASED VALUE BASED BUSINESS & MARKET DRIVEN FLEXIBLE RECOGNITION FAIR OPEN FACILITATING CROSS-BUSINESS MOBILITY,
REALISING ECONOMIES OF SCALE& SHARING BEST PRACTICES
REWARD STRATEGY
REWARD STRATEGY – COMMON SET OF OBJECTIVES & SUCCESS CRITERIA
INCLUDES COMPENSATION, PERQUISITES , INCENTIVES…
OBJECTIVES OF COMPENSATION
ATTRACTING TALENT RETAIN CURRENT TALENT MOTIVATION FOR BETTER PERFORMANCE REWARD DESIRED BEHAVIOR ENSURE EQUITY-INTERNAL & EXTERNAL CONTROL COSTS COMPLY WITH LEGAL REGULATIONS FACILITATE EASY UNDERSTANDING BY ALL EASY ADMINISTRATION
Compensation Strategy Likewise, compensation strategy should mirror
and align with the organization’s strategy Questions to ask regarding alignment:
Who are my competitors? How is my business similar to or different from other
companies? What are the core competencies that give our business
a competitive advantage? How does location impact our ability to attract and retain
talent? What should our competitive position be regarding pay?
Compensation Strategy Decisions Top management usually decides the organization’s
compensation strategy: “Lead” strategies tend to attract more workers, but
don’t necessarily lead to less turnover or less unionization or higher productivity
“Lag” strategies are often chosen to keep labor costs low and profits high, but often result in attracting lower-quality workers who’ll leave for $.05/hr increase
“Target” strategies (pay at market rate) are usually the most effective at attracting and retaining employees
Compensation Strategy Decisions The compensation strategy chosen can be used
overall in the organization or with different core functions independently; for example, An organization decides that it is not attracting or
is losing highly skilled computer analysts The quality of life on a university campus is seen
as a major attraction for employees A new organization in a small town decides to
compete with a similar, more well-established unionized organization 10 miles away in a large city
Strategy Mapping—Desired
ObjectivesAttract & Retain TalentEquitable Treatment
AlignmentCareer GrowthFlexible Design
Competitive PositionMatch CompetitorsEmphasize Life Balance
PerformanceIndividual PerformanceShared Success
ExecutionMaximize ChoicesOpen Communication
1 2 3 4 5
Least Important
Most Important
Strategy Mapping--Current
ObjectivesAttract & Retain TalentEquitable Treatment
AlignmentCareer GrowthFlexible Design
Competitive PositionMatch CompetitorsEmphasize Life Balance
PerformanceIndividual PerformanceShared Success
ExecutionMaximize ChoicesOpen Communication
1 2 3 4 5
Least Important
Most Important
Strategy Mapping Comparison
ObjectivesAttract & Retain TalentEquitable Treatment
AlignmentCareer GrowthFlexible Design
Competitive PositionMatch CompetitorsEmphasize Life Balance
PerformanceIndividual PerformanceShared Success
ExecutionMaximize ChoicesOpen Communication
1 2 3 4 5
Current ----- Desired
Aligning Organizational and Compensation Strategies
What pay strategy might they currently have? Desire to have?
If you were a consultant for this organization, what would you suggest regarding pay strategy? Why?
Strategic Reward Systems : Design and Strategic Choice Issues
Basic goals of a compensation system Attract employees Retain employees Motivate employees Compliance with pay laws Administrative simplicity Cost effectiveness
Strategic Reward Systems : Design and Strategic Choice Issues
Critical Thinking Questions
1. Which goals would be most critical for a technology company
2. Which goals would be most critical for a non-profit company?
Strategic Reward Systems : Design and Strategic Choice Issues
Design Issues Job-based vs. Individual-based pay design Fixed vs. Variable pay Internal vs. External pay equity emphasis Performance vs. Membership as basis for
rewards
Strategic Reward Systems : Design and Strategic Choice Issues
Design Issues Egalitarian vs. Elitist allocation of perks &
rewards Market position of base salaries:
Meet the marketLead the marketLag the market
Monetary vs. non-monetary reward emphasis
Strategic Reward Systems Design and Strategic Choice Issues
Administration Framework Open Pay vs. Pay Secrecy Centralized vs. Decentralized pay
administration
Strategic Reward Systems : Design and Strategic Choice Issues
Critical Thinking Questions:
1. Why do most private firms choose to have a pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system where employee participation is a strong element of corporate culture?
2. Should a manager receive higher pay than the subordinates that she/he supervises?
Strategic Reward Systems II: Design and Strategic Choice Issues
Critical Thinking Questions:
3. What are the strategic advantages of paying below the market for pay? Can a firm sustain this pay choice?
4. Why would a firm decide to pay above the market? Is this choice open to all firms in an industry or sector?
REWARD STRATEGY
REWARD STRATEGY – COMMON SET OF OBJECTIVES & SUCCESS CRITERIA
INCLUDES COMPENSATION, PERQUISITES , INCENTIVES…
Compensation as Motivation
Money and Motivation
Incentives motivate workers See “systematic soldiering” without them Taylor standardized a fair day’s work Which led to the scientific management
movement Which in turn led to modern day HR
practices
MOTIVATION THEORIESCONTENT THEORIES Scientific Management-wages & incentives Human Relations Economic security, working conditions Maslow’s Hierarchy Herzberg-motivators & Hygiene factors Alderfer-ERG Needs McClelland’s –need for achievement, power and affiliation
PROCESS THEORIES Lewin & Tolman- Expectancy concerns Vroom Valence/expectancy Porter & Lawler Performance Satisfaction Lawler E-P-O expectations Locke’s goal achievement theory
CONTEMPORARY THEORIES Festinger & Homans Cognitive dissonance /exchange Heider, De Charmes and Bern Cognitive evaluation & self perception Adams - equity Kelly & Rotter Attribution/ Locus of control
Compensation policy
OBJECTIVES OF COMPENSATION policy
ATTRACTING TALENT RETAIN CURRENT TALENT MOTIVATION FOR BETTER PERFORMANCE REWARD DESIRED BEHAVIOR ENSURE EQUITY-INTERNAL & EXTERNAL CONTROL COSTS COMPLY WITH LEGAL REGULATIONS FACILITATE EASY UNDERSTANDING BY ALL EASY ADMINISTRATION
Objectives of Compensation
EffectiveCompensation
LegalLegalcompliancecompliance
AdministrativeAdministrativeefficiencyefficiency
ControlControlcostscosts
RetainRetainemployeesemployees
AcquireAcquirepersonnelpersonnel
EnsureEnsureequityequity
RewardRewardbehaviourbehaviour
Remuneration Choices
Low Base Salaries
Internal Equity
Individual Performance
Standard, Fixed Package
Lag the Market
No Incentives
Job
Performance
Hierarchical
High Base Salaries
External Equity
Group Performance
Flexible Package
Lead the Market
Many Incentives
Skills
Tenure
High Participation
Remuneration Strategy/Philosophy
Remuneration is consistent with strategic business objectives
Strategic questions: How can remuneration policies and practices achieve these objectives
If seeking the ‘best’ people, then it is incongruent to pay below-market rates
If seeking customer service, then the pay must promote superior customer service behaviour
If seeking team based work, then pay must promote team performance
DIMENSIONS OF COMPENSATION
SALARY BONUS-Performance & Profit sharing LONG TERM INCENTIVES PERKS NON COMPENSATION REWARDS
NON COMPENSATION
SYSTEM
i) Enhance Dignity & satisfaction from work performed
v) Allocate sufficient resources to perform work assignments
vi) Grant Sufficient Control over the Job to meet Personal demands
vii) Offer Supportive Leadership & Management
iv) Promote Constructive Social Relationships with co workers
ii) Enhance Physiological health, intellectual growth & emotional maturity
iii) Promote Constructive Social Relationships with co workers
INTRINSIC REWARDS
MoreInteresting
work
Participation in
Decision making
Opportunityfor personal
growth
Greater JobFreedom
& direction
Diversity of
Activities
MoreResponsibility
WHY EXECUTIVE/MANAGERIAL COMPENSATION IS DIFFERENT
Factors & variables are numerous in management jobs & simple comparisons and ratings may not be possible.
Executives are not organized as unionized staff. Secrecy-differing pay based on competence,
experience, loyalty Not based on individual performance but on unit’s Subject to statutory ceilings ????
FACTORS INFLUENCING MANAGERIAL COMPENSATION
Organization's capacity to pay Prevailing pay & benefits in industry/location Competition in industry & availability of special
competent personnel Flexibility Performance/Productivity/Responsibilities of individuals Organization's Philosophy (to be a leader or pay
prevailing rates) Qualification & Relevant experience Stability of employment & advancement opportunities.
MANAGERIAL TRENDS
1980’S EROSION OF EARNINGS AT SENIOR & MIDDLE LEVELS
1988 RESTRICTION ON DIRECTOR’S SALARY RAISED TO Rs 15,000 P.M. UNDER SEC 269 OF COMPANIES ACT, 1956
1993-REVISED TO 50,000 P.M.+ PERKS EQUAL TO ANNUAL SALARY OR Rs 4.5 LAKH WHICHEVER IS LESS
MANAGERIAL TRENDS
UPTO 1990 MANAGERIAL SALARIES STABLE , LOW & PREDICTABLE
TURNING POINT POST NEP-AGE OF MEGA-BUCK MANAGERS IN 1990’S