Employee Compensation
Management
Book: Human Resource Management
by
Prof. M.A Akkas
Employee compensation
All forms of pay or rewards going to employees and arising from their employment.
▪ In the world of HR, compensation is what companies provide their workers in exchange for
their services, effort, skill, labor, time, and knowledge.
• Direct financial payments
Pay in the form of wages, salaries, incentives, commissions, and bonuses.
• Indirect financial payments
Indirect financial compensation is a benefit given to an employee that has financial value, but is
not a direct monetary payment. It is often referred to as a non-cash benefit. Examples of an
indirect compensation arrangement include offering your employees health insurance, life
insurance, or employee stipends (also called fringe benefits)
SALARY VERSUS WAGE
BASIS FOR COMPARISON SALARY WAGE
1. Meaning A fixed pay that an individual draws for the A variable pay that an individual
work done by him. draws in completing the certain
amount of work.
2. Skills Skilled personnel Semi-skilled or unskilled
3. Payment cycle Monthly Daily/weekly/monthly/piece rate
4. Basis of payment Performance basis Hourly basis
5. Paid to whom Employees (white-collar) Labor (blue-collar)
6. Nature of work Administrative-office work Manufacturing-process work
7. Leaves A full-time employee has a fixed timetable for Such a timetable is not available to
paid vacation days. wage workers, and each day off
results in a loss of pay.
Money as a Motivator: The Debate
• Money is certainly an important motivator for employees; however, it
is controversial to say that money is the primary motivator. This is a
discussion that has to be put into perspective to find answers.
• Classical management thinkers and scholars like F.W. Taylor and Adam
Smith have tended to place money on the large scale of motivators.
• They consider the employee an economic man who is only motivated
by money. They assumed that economic gain was everyone’s primary
motivation. They designed reward systems to encourage high
performance by workers and managers.
• Counter Argument by Abraham Maslow, Fredrick Herzberg and Elton
Mayo.
Forms of compensation
• Base Pay
• Base pay compensation in human resource management (HRM)
refers to the fixed amount of money paid to employees for their
services, including salaries, hourly wages, and piece-rate pay.
• Base pay is the foundation of an employee's compensation and is
intended to provide a stable, predictable income to employees.
• Commission
• Commission is a common form of compensation provided to
employees in sales roles. It will usually be based on a predetermined
quota or target. The higher the quota reached, the higher the
commission will be.
Forms of compensation
• Merit pay
• Merit pay is often given to an employee who meets their targets or
performs well in their role.
• Bonuses
• Companies often offer bonuses to employees based on year-end business
results or the individual meeting their set goals. Sometimes, the decision is
at the manager’s discretion.
• Bonuses can be paid annually, quarterly, or even after the completion of each
project.
• However, bonuses can also be paid without an employee meeting a particular target.
For example, if the business has had a great year and decides to reward everybody.
In this case, the bonus would be classified as variable pay.
Forms of compensation
• Dearness Allowance
• Dearness Allowance (DA) is an allowance given to employees by the
government or private sector employers to compensate for the rising
cost of living due to inflation.
• Incentive
• Incentives are pay that is directly linked to performance. It is usually
monetary compensation and can be in addition to salary or wages. An
employee incentive can be in the form of a gift, free products, paid
time off, profit sharing, corporate discount.
Forms of compensation
• Benefits and Services
• Benefits are all the indirect financial payments an employee receives
for continuing his or her employment with the company or firm.
• Example: Life insurance, Health insurance, Dental insurance,
Childcare benefits, Employee recognition programs, Relocation
assistance, housing, transportation facility.
Non-traditional compensation
• Profit-sharing
• As the name suggests, profit sharing involves the employee receiving
a share of the company’s profits.
• Sharing profits with employees has been used as a means of incentive
compensation. Employees receive a bonus normally based on some
percentage (e.g., 10 to 30 percent) of the company’s profit. The
employee’s basic pay is unaffected.
Non-traditional compensation
• Employee stock ownership plans (ESOPs)
• ESOPs have become popular in business firms in the USA and Japan.
• ESOPs enable employees to become owners or part owners of a
company. Managers and workers see themselves as one group, and
the result is that everyone is highly committed and motivated.
• Under these plans, the employer gives certain stocks of the company
to the employee for negligible or less costs which remain in the ESOP
trust fund, until the options vests and the employee exercises them
or the employee leaves/retires from the company or institution.
Non-traditional compensation
• Gainsharing
• Gainsharing is a bonus incentive system designed to improve
productivity through employee involvement.
• According to a predetermined formula, the gains from “working
smarter” are shared between the employer and the employees.
• An example of successful gainsharing is a group effectively thinking of
ways to reduce costs. A car manufacturing company noticed
approximately $5,000 in waste material for every vehicle produced.
Using a gainsharing program, the group strategized, and they
managed to reduce the waste to $3,000 per car produced.
Non-traditional compensation
• Pay-for-performance (PFP)
• Pay-for-performance (PFP) plan is a method of compensation where
workers are paid based on productivity. It is a system of employee
payment that links compensations to measure work quality or goals.
• Union leader prefers a seniority-based pay system.
• Low-performing senior employees would object to having their
income cut to match their performance level, while a high-performing
new employee might prefer the new arrangement.
Non-traditional compensation
• Pay for Skills
• Skill-based pay is an approach to compensation where the wage rate
is based on the qualifications of the individual doing the job rather
than on the job itself.
• Skill-based pay is introduced to encourage employees to acquire a
variety of skills. Few workers are willing to acquire the necessary skills
without proper incentive systems.
• Employees will receive a pay increase for each new skill that they
master.
Non-traditional compensation
• Sharing through Royalty Payments
• These consist of payments, usually to a union organization of
employees, based on a levy for each output unit or each hour
worked.
• Thus, collected funds are to be used for various purposes, for
example, to aid the unemployed, supplement payments to those
injured on the job, and support various other welfare activities.
Determinants of pay structure and level
1. The Organization’s Ability to Pay:
Wage increases should be given by those organizations which can
afford them. Companies that have good sales and, therefore, high
profits tend to pay higher those which running at a loss or earning low
profits because of higher cost of production or low sales. In the long
run, the ability to pay is important.
2. Supply and Demand of Labor:
The labor market conditions or supply and demand forces operate at
the national, regional and local levels, and determine organizational
wage structure and level. If the demand for certain skills is high and
supply is low, the result is a rise in the price to be paid to these skills.
Determinants of pay structure and level
• Prevailing Market Rate:
• This is known as the ‘comparable wage’ or ‘going wage rate’, and is the
widely used criterion. An organization compensation policy generally tends
to conform to the wage rate payable by the industry and the community.
This is done for several reasons. This results in a considerable uniformity in
wage and salary rates.
• Cost of living
• In recognition of the influence of the cost of living, “escalator clauses” are
written into labor contracts. When the cost of living increases, workers and
trade unions demand adjusted wages to offset the erosion of real wages.
However, when living costs are stable or decline the management does not
resort to this argument as a reason for wage reductions.
Determinants of pay structure and level
• Productivity
• Productivity is another criterion and is measured in terms of output man-
hour. It is not due to labor efforts alone. Technological improvements,
greater ingenuity and skill by the labor are all responsible for the increase
in productivity.
• Trade Union’s Bargaining Power
• Trade unions do affect rate of wages. Generally, the stronger and more
powerful the trade union, the higher the wages. A trade union’s bargaining
power is often measured in terms of its membership, its financial strength
and the nature of its leadership. A strike or a threat of a strike is the most
powerful weapon used by it. Sometimes trade unions force wages up faster
than increases in productivity would allow and become responsible for
unemployment or higher prices and inflation.
Determinants of pay structure and level
• Job Requirements
• Generally, the more difficult a job, the higher are the wages Measures
of job difficulty are frequently used when the relative value of one job
to another in an organization is to be ascertained. Jobs are graded
according to the relative skill, effort, responsibility, and job conditions
required.
• Government regulations
• Management philosophy
Thank you
