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Human ResourceManagement

Compensation & BenefitsManagement

HRM-II-Lecture#1

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Compensation

Deals with every type of rewardindividuals receive in exchange forperforming organizational tasks

Major cost of doing business Chief reason why most individuals seek

employment An exchange relationship

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Compensation Management

Process of determining cost-effective paystructure

Designed to attractand retain

Provide an incentive

to work hard Structured to ensure

that pay levels areperceived as fair

FOM 9.3

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Compensation Compensation in other terms also

called as EmployeeRemuneration.

Remuneration is the compensation; an employeereceives in return for his or her contribution to theorganization.

Remuneration occupies an important place in thelife of an employee. His or her standard of living,status in the society, motivation, loyalty, andproductivity depend upon the remuneration he orshe receives.

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Objective of Compensation

To create a system of rewards that isequitable to the employer andemployee alike

The desired outcome is an employeewho is: Attracted to the work Motivated to do a good job for the

employer Retain their services over an extended

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Factors That Influence Compensation

Unionization

Level of

Compensationand

Benefits

Employeestenure and

performance

Kind of job performedSize of

company

Management philosophy

Kind of businessGeographical

location

Labour- or capital-intensive

Company

profitability

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Determining Pay Rates

Employee compensation All forms of pay or rewards going to

employees and arising from their

employment. Direct financial payments

Pay in the form of wages, salaries,incentives, commissions, and bonuses.

Indirect financial payments Pay in the form of financial benefits such

as insurance.

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Compensation Policy IssuesPay for performancePay for seniority

The pay cycle

Salary increases and promotionsOvertime and shift payProbationary payPaid and unpaid leavesPaid holidaysSalary compressionGeographic costs of living differences

2005 Prentice Hall Inc. Allrights reserved. 118

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Compensation Policy Issues(contd)

Salary compression A salary inequity problem, generally

caused by inflation, resulting in longer-term employees in a position earningless than workers entering the firmtoday.

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Pricing Managerial andProfessional Jobs

Compensating managers Base pay: fixed salary, guaranteed

bonuses. Short-term incentives: cash or stock

bonuses Long-term incentives: stock options

Executive benefits and perks: retirementplans, life insurance, and healthinsurance without a deductible orcoinsurance.

2005 Prentice Hall Inc. Allrights reserved. 1110

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Financial Compensation

Direct FinancialCompensation

Consists of the pay an

employee receives in theform of: wages salaries bonuses

commissions

Indirect FinancialCompensation

Consists of allfinancial rewards notincluded in directfinancialcompensation i.e.,benefits: pensions insurance employee services

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Total CompensationTotal Compensation

DirectDirect IndirectIndirect

BonusesBonuses

GainsharingGainsharingSecurity Plans Pensions

Employee Services Educational assistance Recreational programs

CommissionsCommissions

Wages / SalariesWages / Salaries

Insurance PlansInsurance Plans MedicalMedical DentalDental LifeLife

Time Not WorkedTime Not Worked VacationsVacations BreaksBreaks HolidaysHolidays

Presentation Slide 91

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A Compensationsystem shouldbe:

AdequateEquitable

Balanced

Cost-effective

Secure

Incentive-

providing

Acceptable to theemployee

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Labor Market Economy

Government Unions

External Influences onCompensation

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Equal Pay Act of 1963

Established the concept of equal pay for equal work

Prohibits wage differentials based ongender between men and womenperforming essentially the same workin organizations skill effort responsibility

working conditions

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Pay and Motivation

Motivation set of attitudes andvalues that predisposes a person toact in a specific, goal-directedmanner: the direction of behavior (working to

reach a goal)

the strength of behavior (how hard orstrongly the individual will work)

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Pay and EmployeesSatisfaction

Pay Satisfaction refers to anemployees liking for or dislike of theemployers compensation package

(including pay and benefits)

Lawlers Model the distinctionbetween the amount employees receiveand the amount they think others arereceiving is the immediate cause of paysatisfaction or dissatisfaction

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Pay and EmployeesProductivity

Studies indicate that if pay is tied toperformance, the employee producesa higher quality and quantity of work

The key to making compensationsystems more effective is to be surethat they are directly connected toexpected behaviors

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Traditional Approach toCompensation

Job AnalysisJob Analysis

Job DocumentationJob Documentation

Job RatingJob Rating

Create JobWorth Hierarchy

Create JobWorth Hierarchy

Prepareto SurveyPrepare

to Survey

Conduct SurveyConduct Survey

AnalyzeMarket Data

AnalyzeMarket Data

Reconcile Internal &External Considerations

Reconcile Internal &External Considerations

DevelopPay Structure

DevelopPay Structure

To discover nature of duties performed To clarify authority and responsibility To determine KASOCs To record job information

Typical content: Job summary Specific duties KASOCs

Identify benchmark positions Select information sources

Choose comparators What information is needed? Document survey

Select methods for analysis

Apply job evaluattion instrument

Sore-thumbing Check for evidence of bias

Internal External

Source: Reprinted from Elements of Sound Base S alary Administration , 2nd edition, copyright 1988 , with permission from the American Compensation Associationand American Society for Personnel Administration, 14040 N. Northsight Blvd., Scottsdale, AZ U.S.A. 85260; telephone (602) 951-9191; fax (602) 483-8352 ACA

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Compensation Decisions

Pay-Level Decision

Examines pay relative to employeesworking on similar jobs in otherorganizations

Objective is to keep the organization

competitive in the labor market Pay survey is the major tool used in this

decision

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Compensation Decisions

Pay-Structure Decision

Examines pay relative to employeesworking on different jobs within theorganization

Involves setting a value on each job

within the organization relative to allother jobs

Job evaluation is the approach used

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Compensation Decisions

Individual Pay Determination Examines pay relative to employees

working on the same job within theorganization

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Pay Surveys

Techniques and instruments used tocollect data about compensation paidto employees in: a geographic area an industry an occupational group

Obtaining valid, reliable informationabout pay is critical to creating acompensation system that supports

corporate goals

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GovernmentSources

Professional and Trade

Organizations

Surveys Conductedby OtherOrganizations

Surveys by Journals

Sources of Pay Surveys

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Compensation Conclusion

Determining the worth of a job isdifficult because it involvesmeasurement and subjective decisions

Using systematic job evaluationprocedures is one way to determinenet worth

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How to Develop the

Compensation MechanismMethods & Techniques

HRM-II-Lecture # 2

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Determination of IndividualPay

Three questions need to be addressed:1. How should one employee be paid

relative to another when they bothhold the same job in theorganization?

2. Should we pay all employees doingthe same work at the same levelthe same?

3. If not, on what basis should wemake the distinction?

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Pay differentials are basedon:

1. Individual differences in experience,skills, and performance

2. Expectations that seniority, higherperformance (or both) deservehigher pay

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Methods of Payment

Flat Rates

Payment for TimeWorked

Variable Pay: IncentiveCompensation

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Payment for Time Worked

General, across-the-board increase forall employees

Merit increases paid to someemployees based on some indicator of job

performance

Seniority

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Variable Pay

Percentage of an employeespaycheck is put at risk

If business goals are not met, the payrate will not rise above the lowerbase salary

Annual raises are not guaranteed Helps manage labor costs Does not guarantee equitable

treatment of employees

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Types of Variable Pay

Individual Incentives

Group Incentives

Organization Incentives

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Individual Incentives

Possible only in situations whereperformance can be specified interms of output e.g., sales rupees generated e.g., number of items completed

Employees must work independentlyof each other so that individualincentives can be applied equitably

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Reasons to Use TeamIncentives

When it is difficult to measureindividual output

When cooperation is needed tocomplete a task or project

When management feels this is amore appropriate measure on whichto base incentives

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Organization-wideIncentives

Usually based on one of twoperformance concepts: A sharing of profits generated by all

employees altogether A sharing of money saved as a result of

employees efforts to reduce costs

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Employee Benefits

Five general categories of employeebenefits.government-mandated programsemployee welfare plans, including all

forms of health care plans, survivorbenefits, and disability programspension plans and other long-term

capital accumulation programs, includingprofit-sharing plans, and other savingsplanstime-off programs (whether paid or

unpaid), such as vacation and sick pay

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Pension PlansPension payment to a retired employeebased on the extent and level of employmentwith the organization.

defined benefit plan plan which guarantees a specificretirement payment based on a percentage of pre-retirementincome; typically, the amount is based on years of service,average earnings during a specified time period, and age attime of retirementdefined contribution plan plan whereby the employerprovides a specific amount of money (typically a percent of the base salary) deposited into an individual's account eachperiod; the employee chooses among investment optionsand, typically, may take the vested portion of the accountwith them if they leave employment (vesting refers to the

point in time when pension moneys set aside by a companyfor an individual become the actual property of that

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Components of InternationalCompensation

Four major components. base salary the amount of cash compensation that will

be provided to an individual each pay period foreign service inducements monetary payments

above and beyond base salary that companies offer inorder to encourage employees to accept expatriateassignments

allowances additional money given to expatriates forhousing expenses, educational expenses, relocation

expenses, spouse assistance, etc. benefits indirect forms of compensation that are

intended to maintain or improve quality of life foremployees

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AwardsAwards

Other Employee Benefits and Services

Recreational andRecreational andSocialSocial

Credit UnionsCredit Unions

Food ServicesFood Services

PurchasingPurchasing

AssistanceAssistance

TransportationTransportationPoolingPooling

On-Site HealthOn-Site HealthServicesServices

Legal ServicesLegal Services

FinancialFinancial

PlanningPlanning

Housing andHousing andMovingMoving