COMPENSATION SYSTEM

COMPENSATION SYSTEMCOMPENSATION SYSTEM

IPMI-HRM-Krishnan Rajendran, 2010

What is Compensation?What is Compensation?

Employee compensation is the process of paying and rewarding people for the contributions they make to an organization.

Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work.

Compensation represents the total package of rewards—both monetary and nonmonetary.

Total CompensationTotal Compensation

DirectDirect IndirectIndirect

BonusesBonuses

Gain sharing, etc.Gain sharing, etc. Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

CommissionsCommissions

Wages / SalariesWages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• LeaveLeave• HolidaysHolidays• VacationsVacations


InternalEquity

ExternalEquity

EmployeeContribution

Job Analysis

Market Definition

Market Survey

Policy Decision

PerformanceAppraisal

Incentive Guidelines

Incentive Scheme

Policies Techniques

Internal Alignment

Competitiveness

Contribution

Internal Structure

Job Evaluation

Job Description

Pay Structure

Objectives

Efficiency

Fairness

Compliance

Pay Policy ModelPay Policy Model


Linking Compensation to Linking Compensation to Organizational ObjectivesOrganizational Objectives

Value-added Compensation◦Evaluating the individual components of

the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. “How does this compensation practice

benefit the organization?” “Does the benefit offset the

administrative cost?”


Common Strategic Compensation Common Strategic Compensation GoalsGoals1. To reward employees’ past performance2. To remain competitive in the labor

market3. To maintain salary equity among

employees4. To mesh employees’ future performance

with organizational goals5. To control the compensation budget6. To attract new employees7. To reduce unnecessary turnover

Comparison of Compensation Comparison of Compensation StrategiesStrategies


Strategic Framework for Employee Strategic Framework for Employee CompensationCompensation


The Compensation PackageThe Compensation Package

The compensation package represents the blend of rewards employees receive from the organization.

Money paid as wages or salary is the largest component of most compensation packages.

Benefits and short and long term rewards make up the rest of the package.


Common Elements of Common Elements of Compensation PackagesCompensation Packages

The main elements of the Compensation Package consist of:◦Base pay is a form of

compensation that is not at risk and may consist of an hourly wage or an annual salary.

◦Employee benefits, are rewards other than monetary salary and wages.


Elements of the Compensation Elements of the Compensation PackagePackage

Individual incentive is a reward that is based on the personal performance of the employee. Individual incentives are linked to performance behaviors and outcomes.

A group incentive is a reward based on the collective performance of a team or organization.


Combining Compensation Package Combining Compensation Package Elements.Elements.


HOW DO STRATEGIC DECISIONS HOW DO STRATEGIC DECISIONS INFLUENCE A COMPENSATION INFLUENCE A COMPENSATION PACKAGE? PACKAGE? The organization must decide

how much compensation to allocate to base pay, benefits, individual incentives, and group incentives in order to align pay to the organization’s broad HR strategy.


Strategic Compensation Process.Strategic Compensation Process.


Typical Compensation ElementsTypical Compensation Elements


HOW IS COMPENSATION LEVEL HOW IS COMPENSATION LEVEL DETERMINED? DETERMINED? It all begins with the pay survey.The pay survey provides information about how

much other organizations are paying employees. Pay surveys are conducted by consulting firms,

which obtain confidential pay information from numerous organizations and create reports that describe average pay levels in other organization.

This information is grouped by industry, number of employees, sales volume and/or operating budget.

This makes it easier to determine if the companies pay practice gives it a competitive advantage.


Pay-Level StrategiesPay-Level Strategies There are three market strategies

1. meet-the-market which establishes pay that is in the middle of the pay range for the selected group of organizations.

2. lag-the-market where an organization establishes a pay level that is lower than the average in the comparison group.

3. lead-the-market where the average pay level is higher than the average in the comparison group.


HOW IS COMPENSATION HOW IS COMPENSATION STRUCTURE DETERMINED? STRUCTURE DETERMINED? The pay structure focuses on how

compensation differs for people working in the same organization.

Job-based pay—focuses on evaluating different tasks and duties associated with various jobs in the organization.

Skill-based pay focuses on the difference in skill and ability required to perform the job.


Job-Based PayJob-Based Pay


Skill-based Pay.Skill-based Pay.


Executive Compensation: Ethics Executive Compensation: Ethics and Accountabilityand Accountability Incentive payments are excessive compared

with return to stockholders.Time periods for judging and rewarding

performance are too short.Quarterly earnings growth is emphasized at

the expense of research and development.Emphasis is placed upon equaling or

exceeding executive salary survey averages.

Benefits do not relate closely to individual performance.

The “Sweetness” of Executive Perks

• Company car• Company plane• Executive eating facilities• Financial consulting• Company-paid parking• Personal liability insurance• Estate planning• First-class air travel• Home computers• Chauffeur service• Children’s education

• Spouse travel• Physical exams• Mobile phones• Large insurance policies• Income tax preparation• Country club membership• Luncheon club membership• Personal home repairs• Loans• Legal counseling• Vacation cabins

COMPENSATION SYSTEM

Documents

compensation budgetto

compensation program

form of compensation

compensation practice

compensation systemipmihrm

krishnan rajendran

compensation package

strategic compensation