Compensation Management

INSTITUTIONAL MECHANISM FOR WAGE

DETERMINATION
• The Institutional Factors Influencing or determining wage rates are:
• Intrinsic value,
• Internal relativities,
• External relativities and market practice,
• Inflation,
• The circumstances of the firm and trade union pressures,
• Job evaluation
• Performance management
• Legislation
• Wage Boards
Compensation Policy
• A company’s compensation philosophy refers to the set of guiding
principles that drive decision making about compensation. In its
compensation philosophy, the firm will spell out why it makes the
choices it does about how to pay employees. This philosophy differs
from business to business, but every company seeks to hire and retain
the best talent, and it will express that sentiment in its compensation
philosophy. All companies with employees must determine how and
what to pay their workers and when to offer things like raises,
bonuses and other incentives. Businesses of all types tend not to do
this haphazardly. Rather, they evolve what is called a compensation
philosophy.
Factors Influencing Compensation
Philosophy
• Some of the factors that influence compensation philosophy include
• Present revenue
• Expected profits
• Market value of the jobs
• Degree of competitiveness in the types of jobs a company offers
• The way an organization views its employees and its responsibility to
those employees’
Developing a Compensation Philosophy

• A compensation philosophy lays out the guiding principles for a

company compensation policy. It serves as a mission statement of the
company policy. Some important questions to be raised before
develop compensation Philosophy:
• ➢ How does current compensation strategy support the goals of the
organization?
• ➢ Where does company sit regarding compensation in their industry and
market?
• ➢ Does company demonstrate fair, equitable, and competitive pay practices?
• ➢ How do each employee’s talents link to the organizations goals?
The following are tips for creating a lasting
compensation philosophy:
➢ Be as concise as possible. Company philosophy should be about two
paragraphs in length.
➢ Company to maintain an optimistic yet realistic tone.
➢ Company should keep in mind that the organization has and will go through
changes. Policy can change, but remember, company compensation philosophy
should weather these changes with few adjustments.
➢ Company should ensure that compensation philosophy reflects some of the
values already listed in your company’s mission statement.
➢ Company should see attractive, flexible, and market based pay, competitive in
recruiting and retaining employees through high-quality compensation plans, or
compensation program aligned with shareholder interest
Types of Compensation Philosophy

• Productivity Philosophy: which relates to high wages and low unit cost of
production which assumes:
➢ That the employers should provide the best possible tools, machines, goods and
buildings etc., while the management should apply the latest production technique.
➢ That the production should increase without the uses of commensurate physical
efforts of employees while the unit cost of production should decrease leading to
lower prices of goods.
➢ That the market for goods should expand leading to enhanced sales volume and
➢ That the part of resultant enhanced profits should be used to increase the wages
of the employees and remaining can be ploughed back in the business
Types of Compensation Philosophy
• Purchasing Power Philosophy: makes the following propositions:
➢ That the workers should be paid high wages because they form a large
proportion of the work force and are equipped with a higher propensity to
consume. It results in expansion of the economy’s purchasing power supply
➢ That effective demand for goods and services produced should enlarge in
each establishment
➢ That productivity per worker should increase while the unit cost of
output should decrease leading to enhanced profits and
➢ That increased wages should be paid from this enhanced income to
average the cycle
Company compensation Policy Should
Include
• ➢ Defining the market company will use for external market comparison or “competitive set.”
• ➢ A definition of the process used to determine internal equity (job evaluation).
• ➢ The different types or elements of compensation.
• ➢ Clearly defined management responsibilities.
• ➢ A guide for the administration of the compensation program.
• ➢ Minimum wages and salaries
• ➢ Methods of wage/salary payment
• ➢ Profit sharing and incentive plans
• ➢ Non monetary rewards
• ➢ Procedure for getting pay
• ➢ Whether to pay prevailing or more than prevailing salary scale
COMPENSATION APPROACH
• Compensation Management contributes to the overall success of the
organization in several ways. There are three different main goals of
compensation management recruiting, motivating and retaining good
people have not changed over the time, but they ways in which some
companies approach them differ dramatically from previous
approaches. Performance based pay, tailored to the strategic
circumstances of each organization, may consist of base pay, an
annual bonus, and a choice of various other benefits. This is known as
“total rewards” package
Approach to Compensation Management
• Traditional Compensation Approach
• For some organizations, a traditional compensation approach makes sense and offers certain
advantages in specific competitive situations. It may be more legally defensible, less complex, and
viewed as more “fair” by average and below average employees. It reflects a logical, rational
approach to compensating employees
• Total Rewards Approach
• It tries to place a value on individual rather than just the jobs. Widespread use of various inventive
plans, team bonuses, organizational gain sharing programmes, and other designs serves to link
growth in compensation to results. However, management must address the following two main
issues when using variable pay systems:
• ➢ Should performance be measured and rewarded based on individual, group or organizational
performance?
• ➢ Should the length of time for measuring performance be short term (less than one year) or
longer term (more than one year)
Approach to Compensation Management
• 3 P’s Approach to Compensation Management
• The 3P approach to compensation management supports a company’s
strategy, mission and objectives. It is highly proactive and fully
integrated into a company’s management practices and business
strategy. The 3P system ensures that human resources management
plays a central role in management decision making and the
achievement of business goals
• ➢ Paying for position
• ➢ Paying for person
• ➢ Paying for performance
3 P’s Approach to Compensation Management

• Managers are capable of dealing with this sometimes difficult issue in

a professional and effective manner. By keeping the following basic
points about pay in mind, they can address virtually any pay-related
topic with the employees in a professional and productive manner.
• Specificity is Key
• Pay is a topic with many different shades and a variety of implications.
Whenever approaching the subject, it is important to work out the
details beforehand so that specifics can be clearly communicated. For
the manager, this means that the increase amount is nailed down
before discussing a promotion with an employee
3 P’s Approach to Compensation Management
• Pay is Relative
• What one employee considers a fantastic increase maybe an insult to
another? Each individual has a unique set of creativity and competencies.
Pay should be based on the performance, position and the
competencies/skills the person is having
• Pay is Not Created Equal
• Various forms of pay have different purposes. The two most common forms
of direct cash compensation in most companies are base pay and bonus.
Base pay is the annual salary or hourly wage paid to an employee given the
job he holds, While bonus is typically (or at least should be) rewarded based
on the achievement of a goal of the organization.
3 P’s Approach to Compensation Management
• Pay Based on the Performance
• Even when performance is a factor, the manager is faced with the
difficult task of evaluating an entire year’s worth of activity and then
categorizing it according to the percentage increase options allowed
by the budget. It becomes very difficult to pinpoint specific employee
actions or accomplishments as the reason for the increase. For these
reasons, it’s appropriate for the discussion about base pay increases
to be more general and balanced. Both strengths and weaknesses of
the employee should be addressed.
 Executive Compensation
• The types of employees that are typically paid with executive
compensation packages include corporate presidents, chief executive
officers, chief financial officers, vice presidents, managing directors
and other senior executives.
• An organization developing an executive compensation program will
improve its chances of success by following five approaches:
• ➢ First, define the organization’s short- and long-term strategies,
objectives and key measurements.
• ➢ Second, vest responsibility for executive compensation in a
compensation committee consisting of independent board members.
Executive Compensation
• ➢ Third, take a total rewards perspective by looking at each
component of the compensation program as part of a portfolio of
provisions rather than stand-alone items.
• ➢ Fourth, establish the executive compensation portfolio to provide
an appropriate allocation of base and variable (at risk) compensation,
short- and long-term programs and performance incentives versus
retention and attraction incentives. The optimal mix will vary by
company.
• ➢ Fifth, make the program as simple as possible.
Executive Compensation
• Performance Objectives and Measurements
• All executive compensation programs and decisions should derive
from the performance objectives and measurements of the
participating executives. Traditionally, executives’ performance
measurements have been focused on hard financial metrics such as
earnings-per-share, total shareholder returns, revenue and profit
before tax. In recent years, there has been an increasing concern that
an excessive focus on financial results will actually cause a decline,
over time, in financial performance
Executive Compensation
• Executive Benefits and Perquisites
• Company practices on benefits and perquisites differ widely. The
general trend is towards a reduction in special provisions for
executives. For benefits, the most common practice is for companies
to provide the standard insurance programs to their executives.
Where the amount of a benefit provision is contingent on income (life
or disability coverage, for example), some companies will adjust the
standard maximums for coverage to reflect the higher levels of
income that will need to be replaced in the event of the death or
disability of an executive.
Executive Compensation
• Psychological Compensation
• While compensation discussions tend to focus on financial provisions, a total
rewards approach also looks at non-financial or psychological compensation. This
is directed at more intrinsic motivators. An executive’s psychological compensation
is most likely to come from the characteristics of his or her work environment or
individual nature. Examples include congruence between work and values, degree
of autonomy, relationships with peers and more senior executives or board
members, relationships with the people they lead, the opportunity for visible
achievement and public recognition, intellectual and professional challenge and
the ability to have an impact outside the company by being involved in charitable,
educational, public policy or other community endeavors. In summary, executive
compensation has become a subject of considerable public scrutiny.
Components of Executive Compensation
• Base Pay
• Non-Discretionary Cash Bonuses
• Discretionary Cash Bonuses
• Stock Options
• Stock Appreciation Rights