WHAT IS COMPENSATION

COMPENSATION

Compensation is what employee receives in exchange for

their contribution to the organization.
 WHAT IS COMPENSATION
MANAGEMENT

COMPENSATION
MANAGEMENT

Compensation management help the

organization to obtain, maintain and
retain a productive Workforce.
 According to Thomas J. Bergmann(1988)
compensation consists of four distinct components:
Compensation = Wage or
Salary + Employee benefits +Non-
recurring financial rewards+ Non-pecuniary rewards.

Compensation is a tool used by

management for a variety of purposes to further the existence
of the company. Compensation may be
adjusted according the business needs, goals, and available
 OBJECTIVES OF
COMPENSATION MANAGEMENT
Acquire
Qualified
Personnel

Retain Present
Ensure Equity
Employee

Reward Desired
Control Cost
Behavior

Comply with Facilitate

Legal Regulations Understanding

Further
Administration
Efficiency
TYPES OF COMPENSATION

Types of Compensation

1. Direct compensation
(financial)

2. Indirect compensation
(financial & non-financial)
 Direct compensation
Direct compensation is a financial (or monetary)
form of compensation.
Here are the four main types of direct
compensation

1. Hourly Wages

Hourly wages are often provided to unskilled,

semi-skilled, temporary, part-time, or contract
workers in exchange for their time and labour. 
 2. Salary

Annual salaries are typically provided to most

full-time employees or skilled employees and
those who fill management positions.

A salary often indicates that the organization has

invested in this employee for the long-term
future.
 3.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. 
 4.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.
 Indirect compensation
• Indirect compensation is still a financial form
of compensation since it has a financial value.
However, employees do not directly receive it
in cash form.

• That’s why certain types of indirect

compensation are viewed as monetary, while
others are deemed non-monetary. This often
varies between organizations. 
 Equity Package

Equity as part of a compensation package essentially means

the employee is offered equity (ownership) in the company,

either through shares of stock or the option to buy such

shares. 

An equity package is common at start-up companies. These

businesses may be low on cash or funding and need other

incentives to attract and retain employees. 

 Stock options
• This form of compensation entitles employees to
purchase a set number of shares at a fixed price
after a certain period.

• This is different from an equity package because the

employee will not have any ownership in the
company. 

• Many stock options require employees to work

between three to five years before they can access
this compensation
 Other Benefits 

• Typical employee benefits usually include

health insurance, life insurance, retirement
plans, disability insurance, legal insurance, and
pet insurance.
• Retirement funds and pension plans are also
common benefits that employees look for when
considering a new role at a new organization.
 Non-monetary compensation
Non-monetary compensation includes benefits like:
• Paid or non-paid time off
• Flexi-time
• Learning and development opportunities
• Parental leave
• Childcare
• Company cars
• Phones or laptops,
• Meals.
 Principles of
compensation:

1. To be legal: It must get approval from the govt. or top

management in the organization
2.To be adequate: compensation must be sufficient so that
needs of the employees are fulfilled substantially
3. To be Motivational: compensation must increase the
level
of motivation and job satisfaction of the employees.
4. To be equitable: compensation policy should be declared in
such a way so that no discrimination can be observed.
5 .To provide security: Employees must have guarantee
of getting wages or compensation regularly without any
break.
6. To be cost benefit effective: The organization must make a
balance between cost for giving compensation and benefits to
be accrued from the employees.
Individual and Team Rewards 1/3

When creating their incentive / compensation p
lans, companies need to 
consider whether their
particular work environment thrives using team
 or individual performance rewards. 
 Individual and Team Rewards 2/3
 Employees should be able to
 work individually and as part of a group on 
the job, the incentives/compensation provided to
workers play a big role in how they perform. 
Individual and Team Rewards 3/3

Since the corporate culture and productivity 
of a business depends on how workers interact 
with each other, managers should consider
restructuring their incentive/ compensation to 
include individual or team rewards. 
 What Is Strategic Compensation?

Strategic Compensation refers to the design and

implementation of compensation systems to
reinforce the objectives of both HR strategies
and competitive business strategies.
Relationship Between Strategic Decisions and
Compensation Practices
Competitive Business Strategy Choices

• Lowest cost strategy: focus on being

lowest cost producer/seller of goods or
services

• Differentiation strategy: focus on

offering unique goods or services to the
public
Elements of Core Compensation
• How Base Pay Is Adjusted over Time
– Cost-of-living adjustments (COLAs)
’

– Seniority pay
– Merit pay
– Incentive pay
– Person-focused pay or competency-based pay: pay-for-
knowledge, skill-based pay
 Base Pay Adjustments
• C O L As: C O L As represent periodic base pay increases that are
’ ’

founded on changes in prices as indexed by the consumer price

index (CPI)

• Seniority pay: seniority pay systems reward employees with

periodic additions to base pay according to employees’ length
of service in performing their jobs

• Merit pay: merit pay programs assume that employees’

compensation over time should be determined, at least in part,
by differences in job performance
 Base Pay Adjustments
• Incentive pay: incentive pay (or variable pay) rewards
employees for partially or completely attaining a
predetermined work objective

• Pay-for-knowledge plans: pay-for-knowledge plans reward

managerial, service, or professional workers, for successfully
learning specific curriculum.

• Skill-based pay: skill-based pay is used mostly for employees

who perform physical work and increases these workers‘pay
as they master new skills
 Employee Benefits
• Discretionary benefits

• Legally required benefits

 Discretionary Benefits
• Three broad categories

– Protection programs: provide family benefits, promote health,

and guard against income loss caused by such catastrophic
factors as unemployment, disability, or serious illness

– Paid time-off: provides employees with pay for time when

they are not working

– Services: provides such enhancements as tuition

reimbursement and day care assistance to employees and
their families
Legally Required Benefits
– Promote worker safety and health

– Maintain family income

– Assist families in crisis
– Provide assistance in case of
▪ Disability
▪ Unemployment
 Compensation as a Retention Strategy

• Focusing on the strategic objectives;

• Ensuring commitment through participation and
communication;
• Analyzing job functions;
• Writing job descriptions;
• Determining internal pay equity;
• Ascertaining external pay equity;
• Designing the salary structure.
 TYPES OF VARIABLE PAY PLANS

 Piece Rate
 Sales Commissions
INDIVIDUAL  Bonuses
 Special Recognition

ORGANIZATIO
GROUP
NWIDE

 Profit Sharing  Gain Sharing

 Employee Stock Options  Labor Cost Reduction
 Executive Stock Options
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Phase 1 Job Analysis
Identity and Study jobs

Position Description Job Description Job Standard

Phase 2
Internal Equity Job Evaluation

Job Ranking Job Grading Factor Comparison Point System

Phase 3
External Equity Salary & Wages Survey

Dept. Of Labor Employee Associations Professional Association Self Conducted Survey

Phase 4
Matching Internal and Pricing Job
External Work

Job Evaluation Worth Match Rate & Range for Each Job Labor Market Worth
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Phase 1
Identity and
Job Analysis Study jobs

Position
Description

Job
Description

Job
Standard
 JOB ANALYSIS

JOB ANALYSIS

A Systematic way of gathering and analyzing

information about the Content, Context, and
the Human Requirements of jobs for the
purpose of developing Job description, Job
specification & Job evaluation.
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Job Evaluation Phase 2

Internal
Equity
Job
Ranking

Job
Grading

Factor
Comparison

Point
System
 JOB EVALUATION

Systematically determining the relative

worth of the jobs to create job structure.

Or
Determining the worth of job for reward,
benefits & compensation system.
JOB EVALUATION METHODS

1. Job Ranking
Method

2. Job Grading /
4. Point System Classification
Method

3. Factor
Comparison
Method
 1. JOB RANKING METHOD

DEFINITION

Arrangement of job in a simple rank order form

highest to lowest or form lowest to highest.

Raters examine the JD of the each job.

Arrange in order according to value. e.g. starting from lowest

to highest

 Janitor ranked 1
 Secretary gets 2
 Office manager gets 3
2. JOB GRADING METHOD

Assigned a grade or class for each job.

• These classification are created by

identifying a number of job related factors
Step 1 such as, education,
responsibilities with the
experience and
goal to determine
classes or grades of Job.

• After classifications, jobs are ranked

in an overall order of importance
Step 2 according to criteria chosen and each
job is placed in its appropriate grade

• The standard description that most

Step 3 nearly matches the JD determines
the job’s grading/classification.
3. FACTOR COMPARISON METHOD

The each compensable factor such as responsibility, skill,

mental effort, physically effort and working conditions is
compared one at time with the same factor for other key job and
then evaluated.

i. Determine the
Compensable Factor

ii. Determine Key Jobs

Steps Of iii. Apportion Present

Factor Wages for Key Jobs
Comparison iv. Place Key Jobs on a
Method Factor Comparison Chart

v. Evaluate Other Jobs

 4. POINT SYSTEM METHOD

An approach to job evaluation in which numerical values are assigned to

specific job factors and the sum of those values provides a quantitative
assessment of a job’s relative worth.

Determine the Critical factor

1
Determine Sub-factor
2
Steps Of Determine the levels of factors
3
Point System
Allocate points to factor
Method 4 under each level

Develop a point manual

5
Apply the point system
6
 1st 2nd 3rd 4th 5th
Factors Degree Degree Degree Degree Degree
SKILL
• Education 15 30 45 60 75
• Experience 20 40 60 80 100
• Initiative and Ingenuity 15 30 45 60 75
EFFORT
• Physical demand 10 20 30 40 50
• Mental or visual demand 5 10 15 20 25
RESPONSIBILITY
• Equipment or process 5 10 15 20 25
• Material or product 5 10 15 20 25
• Safety of others 5 10 15 20 25
• Work of other job conditions 5 10 15 20 25
JOB CONDITIONS
• Working conditions 10 20 30 40 50
• Unavoidable hazards 5 10 15 20 25
 A Point Manual Description of “Responsibility:
Equipment and Material”
1. RESPONSIBILITY

b. Equipment and materials: each employee is responsible for conserving the company’s
equipment and material. This includes reporting mal functioning, equipment or defected
material, keeping equipment and material clean or in proper order, and maintaining ,
repairing, or modifying equipment and materials according to individual job duty. The
company recognizes that the degree of responsibility for equipment and material varies

widely through out the organization

Level1: Employee reports mal functioning equipment or defective materials to immediate

superior.
Level 2: Employee maintain the appearance of equipment or order of materials and has
responsibilities for the security of such equipments and materials
Level 3: Employee performs preventive maintenance and minor repairs on equipment or
corrects minor defects in materials
Level 4: Employee performs major maintenance or overhauls of equipment or is
responsible for deciding type, quantity, and quality of material to be used.
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Wage & Salary

Phase 3
Survey External
Equity
Department of
Labor

Employee
Associations

Professional
Association

Self-Conducted
Surveys
 WAGE AND SALARY SURVEY

A collection of data on existing compensation rates for workers

performing similar jobs in other organizations.

Steps in Wage And

Salary Survey

Department of Labor
i. Identifying Key Jobs
Employee
Associations
ii. Selecting the Organizations
to Survey Professional
Association

iii. Data Collection Sources Self-Conducted

Surveys

iv. Interpreting the Data On live Surveys

 PRICING JOB

Allocate the Value to the job After matching the job evaluation
worth with the market worth.

Establishing Pay Steps in

Pricing Job
Structure

Establishment of Pay Grades

Establishment of Pay Ranges

ESTABLISHING PAY STRUCTURE

• Used for tying pay survey information to job

Wage evaluation data.
Curve
• The line on a graph showing the relationship
between job value, as determined by job
Market evaluation points, and pay survey rates.
Line
• A grouping of individual jobs having
Pay approximately the same job worth.
Grades

• It involves collapsing multiple salary grades and

Broad ranges into a few wide levels known as bands.
Banding
• Using the market line as a starting point, the employer
can determine maximum and minimum pay levels for
each pay grade by making the market line the midpoint
Pay line of the new pay structure.
Ranges
 ESTABLISHING PAY STRUCTURE

Establishing
Pay Structure
Pay Scatter
Gram
Pay Grades &
Pay Ranges
 INCENTIVE SYSTEMS &
GAIN SHARING
• links compensation and
performance by rewarding
Incentive performance instead of seniority
or hours being worked.
System • Incentive system could be
individual based

Gain • Matches an improvement

SHARING (gain) in performance with a
distribution (sharing) of the
benefits with employees.
INCENTIVE SYSTEMS & GAIN SHARING
INCENTIVES DESCRIPTION
Piece Work Compensates the worker for each unit of output

Production Paid to workers for exceeding output goals

Bonuses
Commissions The seller may be paid a percentage of selling price or a
flat amount for each unit sold
Merit Raises Pay increases given after an evaluation of performance

Pay for Rewarding employees with higher pay as an incentive

for increased knowledge or skills they acquire.
knowledge/pay
for Skills
Compensation
Non Monetary e.g. recognition programs in which employee receives
certificates, time off, vacations etc
Incentive
Executive Stock option: the right to purchase the company’s stock
at a predetermined price.
Incentive
Weighted incentive systems: reward executives on the
basis of improvements in the multiple areas of business
INCENTIVE SYSTEMS & GAIN SHARING

GAIN
DESCRIPTION
SHARING
Employee Many company have stock purchase plans that
allow workers to buy shares in the company, so
Ownership owing the fractional part of the firm and sharing
its success
Production Allow groups of workers to receive bonuses for
exceeding predetermined levels of output.
Sharing
Plans
Profit Share profits with the employees
Sharing
Plans
Cost Scanlon Plan: Employees aim to reduce costs and
then share in the savings that result.
Reduction
Bonuses on improvements in quality of labor costs
plans compared with the historical norms
 EQUITY FACTOR APPROACH

The perceived fairness of the relation between what a

person does (inputs) and what the person receives
(outcomes).
 EQUITY FACTOR APPROACH Cont . . .

COMPARISON
PERSON
OTHER

My Rewards (Outcomes) Other’s Rewards

My Contributions (Inputs) Other's Contributions Equity

Inequity
My Rewards Other’s Rewards
(Under-
My Contributions Other's Contributions
Rewarded)
Inequity
My Rewards Other’s Rewards
(Over-
My Contributions Other's Contributions
Rewarded)
EQUITY FACTOR APPROACH Cont . . .

PROCEDURAL JUSTICE

The perceived fairness of the process used to determine the

distribution of rewards.

DISTRIBUTIVE JUSTICE

Perceived fairness of the amount and allocation of rewards

among individuals.
 PHASE WISE MODEL OF
COMPENSATION MANAGEMENT

Phase 4
Pricing Job Matching
Internal and
External Work
Pay above the
Market Rate

Pay Market Rate

Pay below the

Market Rate
 MARKET RATE & COMPENSATION
PLANS

1. Pay Above the Market Rate

Advantages Disadvantages
 Attracts better employees.  Additional Compensation Cost

 Minimize voluntary turnover.  Sense of entitlement

 Fosters Strong culture &

competitive Superiority
 MARKET RATE & COMPENSATION
PLANS

1. Pay Market Rate

Advantages Disadvantages
 Higher quality of Human  Does not attract huge factor
Resource at midrange of market- forever
driven Compensation.

 Turnover will vary with labor

demand of competitively firms.
 MARKET RATE & COMPENSATION
PLANS

1. Pay Below Market Rate

Advantages Disadvantages
 Lower Compensation Costs  Lower Quality Employee

 Useful in labor Market where  Low Moral / Job Satisfaction

Unemployment rate large

 High Turnover, Especially

wage
 Objectives of Acquire Qualified
Ensure Equity
Reward Desired Facilitate
Compensation Personnel Behavior Understanding
Management Retain Present Comply with
Employee Control Cost Legal Regulations

Intrinsic
Compensation
Types of
Compensation
Extrinsic
compensation

Financial Wages & Gain

Financial Rewards Rewards Salaries
Incentives
Sharing
Vs. Non Financial
Non Financial
Rewards
Rewards Fringe Benefits

Phases of
COMPENSATION Compensation
Management
MANAGEMENT

Scientific1
PHASE 2
Scientific
PHASE PHASE 3
Scientific PHASE 4
Scientific
Job Analysis
Management Management
Job Evaluation External Equity
Management Pricing Job
Management
(Identify & Study the Job) (Internal Equity) (Salary & Wages Survey) (Matching Internal & External
Equity)

Scientific Scientific Scientific

• Department of Labor
Scientific
• Job Evaluation Worth
Management • Job Ranking
Management Management Management
• Position Description • Employee Associations • Match Rate & Range
• Job Grading
• Job Description • Professional for
• Factor Comparison
• Job Standard Associations each Job
• Point System
• Self Conducted Survey • Labor Market Worth

• Pay Above the

Market Rate & Management Quality
Compensation Market Rate Circle
Plans • Pay Market
Rate
• Pay Below the CHAPTER 8
Market Rate
 THOUGHT OF THE DAY

If you pick the right people and give them

the opportunity to spread their wings and
put compensation as a carrier behind it
you almost don't have to manage them.
“Jack Welch”