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Purpose & Scope of Compensation Unit 1:. Compensation defined Compensation represents both the intrinsic and extrinsic rewards employees receive for performing.

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Presentation on theme: "Purpose & Scope of Compensation Unit 1:. Compensation defined Compensation represents both the intrinsic and extrinsic rewards employees receive for performing."— Presentation transcript:

1 Purpose & Scope of Compensation Unit 1:

2 Compensation defined Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs. Intrinsic Compensation reflects the employee’s psychological mind-set that result form performing their jobs. Extrinsic compensation includes both monetary and nonmonetary rewards.(Martocchio, 2006, pg.3)

3 Intrinsic Compensation According to job characteristics theory: employees experience enhanced psychological states when their jobs rate high in these five core job dimensions: Skill variety, Task identity Task significance, Autonomy Feedback

4 Core job Characteristics of intrinsic Compensation Skill variety: the degree to which the job requires the person to perform different tasks and involves different skill, abilities and talents. Task identity: the degree to which a job enables a person to complete an entire job from start to finish Task significance: the degree to which the job has an impact on the lives or work of other people Autonomy: the amount of freedom, independence and discretion the employee enjoys in determining how to perform the job. Feedback: the degree to which the employer provides the employee with clear and direct information about job outcomes and performance.

5 Benefits of Intrinsic Compensation Core Job CharacteristicsCritical Psychological State Benefits to Employers Skill variety, task identity, task significance Experienced meaningfulness of the work Lower turnover AutonomyExperienced responsibility for work Outcomes Lower absenteeism Enhanced job Performance FeedbackGained Knowledge of results from work activities Greater Job satisfaction

6 Compensation Philosophy A pay philosophy is a company's commitment to how it values employees. A consistent pay philosophy gives the company and the employee a frame of reference when discussing salary in a negotiation For companies in the private sector, this usually requires a competitive pay philosophy. For companies in the public sector, this means a well-rounded philosophy, with a focus on benefits and work life.

7 Essentials of Compensation Philosophy: Effective compensation philosophies are essential to business success. Does your company’s compensation philosophy support your current business strategy? Compensation philosophies reap little reward without the knowledge and alignment to the organization’s overall strategy. Armed with the right information, compensation professionals can create a philosophy that will stimulate a more engaged workforce and lead to a higher-performing organization

8 GOALS The goal of a pay philosophy is to attract, retain, and motivate employees But few companies can afford to attract, motivate, and retain via generous compensation. The challenge is to create a pay program that acknowledges all three goals without exhausting resources.

9 Companies Attract, Motivate & Retain through Compensation Compensation Base PayIncentivesBenefits A pay philosophy is a blend of all three, since the company must pay for whatever it delivers to employees. For example, a company's pay philosophy might be to offer salaries that are competitive in the market, or it might favour pay that is structured to attract employees rather than pay that helps to retain them.

10 Base Pay, Wages or Salaries Base Pay, Wages or Salaries: the salary and after-tax amount paid to employees. Wages determine the lifestyles of a wage earner and their dependents and underscore the importance of the job and the pay received.

11 Wage and salary add-ons Wage and salary add-ons: it includes overtime pay, shift differentials, premium pay for working weekends and hlidays and other add-ons for being on call are for other demands not normally required by workers.

12 Incentives Incentives are payment for specialized output. Individual work would be defined exactly, daily output measured and pay would be tied directly to the measured output. Eg. Service jobs, data entry operators and processing clerk in large banks and insurance companies. Many factory work fit neatly into the pay the for output system of compensation.

13 Benefits and Services This includes time off with pay, when employment has been suspended or terminated, pay when unable to work because of accident or sickness, payments for medical protection or attention, retirement pay, pay to dependents upon death of employee and provision of a wide variety of desirable goods and servicing ranging from company car, cafeteria services, tuition reimbursement, child and elderly care, to recreation activities

14 Variable/Incentive Pay Variable/incentive pay rewards employees for partially or completely attaining a predetermined work objective. It is defined as compensation (other than bae pay or wages ) that fluctuates according to employees ‘ attainment of some standard based on a predetermined formula, individual or group goals, or company earning.

15 Issues to be addressed: The role reward plays in achieving performance goals and ensuring continuous performance. How rewards aligns with organization values regarding innovation, teamwork, flexibility, and quality. Achieve fairness equity and consistency. The extent to which the emphasis is on achieving internal and external equity Importance to teams as distinct to individual rewards

16 7-16 Employee Compensation is: Employee compensation is: ◦ all forms of pay or rewards going to employees and arising from their employment There two types of extrinisic compensations: ◦ Direct financial payments ◦ Indirect payments Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

17 Employee Compensation Direct financial payments ◦ Payments in the form of wages, salaries, incentives, commissions, and bonuses Indirect payments ◦ Payments in the form of financial benefits such as employer-paid insurance and vacations 7-17 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

18 Features of Pay Philosophy Link reward to Values and Beliefs Flowing from Business Strategy Integration with Business Strategies

19 Link reward to Values and Beliefs Pay philosophy should provide an opportunity to reinforce the organisation values as performance, quality, teamwork and innovation. Example Mahindra group focus on innovation as a factor to be evaluated during job evaluation for purpose of measuring relative worth of job

20 Flowing from Business Strategy: Reward strategy should match business strategy because it intends to achieve competitive advantage through innovation and quality. A manufacturing firm where the business strategy is to differentiate through concentration on quality rather than on price. Reward strategy focuses on any aspects of design, development, manufacturing and administration where rewards could be related to quality. This has resulted in the introduction of 360 feedback with the emphasis on quality as a product of good teamwork.

21 Integration with Business Strategies. Integrating reward an d business strategy means combing them as whole so that there is a fit between them. ◦ Alignment of organizational and individual competences: competency based pay structures are founded on the requirement to meet market need and customer expectations. ◦ Integration with personal and developmental strategies: The Armstrong and Baron research identified a number of organizations which had integrated reward, employee development and performance management strategies. These included Thomas cook, General electronics, and ford ◦ Contingency Theory

22 Determining Compensation Philosophies Companies can choose from three pay level policies: Market Lead: Market Lag: Market Match: Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall7-22

23 Market Lead Market lead distinguishes a company from the competition by compensating employees more highly than most competitors. Leading the market denotes pay levels that place in the area above the market pay line. This policy is appropriate for companies that pursue differentiation strategies.

24 Market Lag The market lag distinguishes a company from the competition, but by compensating employees less than most competitors. Lagging the market indicates that pay levels fall below the market pay line. Market lag policy seems to fit well with lowest cost strategies because some companies realize cost savings by paying lower than the market pay line. Paying well below the market pay line will probably be offset by long term costs.

25 Effects of Market Lag Policy Companies that use the market lag may experience difficulties recruiting and retaining highly qualified employees. Too much turnovers will undercut a company’s ability to operate efficiently and to market goods and services on a timely basis. Therefore companies that adopt market lag policies need to balance cost savings with productivity and quality concerns.

26 Market Match The market match policy most closely follows the typical market pay rates because companies pay according to the market pay line. Thus, pay rates fall along the market pay line. The Market match policy represents a safe approach for companies because they generally no more or less on compensation per employee than their competitors.

27 Pay Policies used by Most Companies Most companies use more than one pay policy simultaneously. Some companies generally use market match and market lead policies for professional and managerial talent because these employees contribute most directly to a company’s competitive advantages. Companies typically apply market and market lag policies to clerical, administrative and unskilled employees (eg. Janitorial). Companies demand for these employees relative to supply in the relevant labour markets are low and these employees contributions to attainment of competitive advantage are less direct.

28 Types of Compensation Job based Skill based Team based Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall7-28

29 Job based pay Job based pay compensates employees for jobs they currently perform. HR professionals establish a minimum and maximum acceptable amount of pay for each job.

30 Skilled Based Pay Rewards managerial, service or professional workers for successfully learning specific curriucula. This rewards employees for the depth and types of skills and knowledge they are able to apply productively to their jobs. Used mostly for employees who do physical work and increases these workers pay as they master new skills Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall7-30

31 Reasons for Skills Based Pay Technological innovation: employees have to keep up with technological advancement in their fields. Increased global competition : employers to get more skills to stay competitive.

32 Team /Group Based Incentive Group incentive plans reward employees for their collective performance rather than for each employee’s individual performance. Group incentive programs are most effective when all group members have some impact on achieving the goal, even though individual contributions might not be equal.

33 Team Based Incentives cont… Ultimately, well designed group incentive plans reinforce teamwork, cultivate loyalty to the company and increase productivity. Team or group based may receive incentives based on criteria such as customer satisfaction, safety records, quality and production records.

34 Team Based A business goal or gain sharing plan can focus on a small team. A team incentive plan shares the incentive earned from achieving goals with team members. The focus is on shared goals-if one member wins, the others do as well ( the concept of shared destiny or ‘we are all in it together’) Support for the use of team incentives comes from research showing that teams using team based incentives out perform those using only pay solutions based on individual performance.

35 Distribution of Team Based Incentives 1. Equal incentive payments to all team members 2. Differential payments to team members based on their contribution to the team’s performance 3. Differential payments determined by ratio of each team member’s base pay to the total base pay of the group.

36 Impact of these Distribution Methods The equal incentive payments approach reinforces cooperation among team members except when team members perceive differences in member contributions or performance. The differential incentive payment approach distribute rewards based to some extent on individual performance. This approach can hinder cooperative behaviour as some employees may focus on their own performance rather than the group’s performance because they wish to maximize their income.

37 Impact of these Distribution Methods… cont… As a compromise companies may base part of the incentive on individual performance with the remainder based on the team’s performance. The differential payment by ratio of base pay, rewards each group member in proportions to his/her base pay. This approach assumes that employees with higher base pay contribute more to the company and so should be rewarded in accord with that worth.

38 Use of Team/Group Based Incentives These promote supportive,collaborative behavior among employees. Group incentives work well in manufacturing and service delivery environments that rely on interdependent teams.

39 How Base Pay is adjusted over Time Overtime, employees adjust employees base pay to recognize increases in the cost of living, differences in employee’s performance, or differences in employee’s acquisition of job-related knowledge and skills.

40 Compensable Factors Base pay is influenced by four compensable factors. These factors can be listed as an employee's skill level, an employee's effort, an employee's level of responsibility, and the severity of the working conditions Compensable Factors: An employee’s skill level An employee’s effort An employee’s level of responsibility The severity of the working conditions Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 1- 40

41 Elements of Core Compensation Base pay - Hourly pay- Annual salary Base pay adjustments - COLAs (cost of living adjustments) - Seniority pay - Merit pay- Skill-based pay - Incentive pay- Person-focused pay Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 1- 41

42 Base Pay Base Pay Core compensation consists of base pay and its adjustments. Base pay includes hourly pay wage and annual salary. The other elements of core compensation include cost-of-living adjustments (COLAs), merit pay, incentive pay, seniority pay, skill-based pay, and person-focused pay. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 1- 42

43 Factors Affecting Base Pay Adjustments COLAs—COLAs 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. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 1- 43

44 Base Pay Adjustments (Cont’d) 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 curricula 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. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 1- 44

45 7-45 Skill Based Pay Competency–skill-based pay ◦ Employee is paid for the range, depth, and types of skills and knowledge he or she is capable of using rather than for the responsibilities of the job currently held Competencies ◦ Demonstrable personal characteristics such as knowledge, skills, and behaviors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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47 How to devise Competitive Pay Philosophy Example: Suppose a small company with moderate cash resources is establishing a pay philosophy. The philosophy might look something like this: Pay a competitive base salary - not an aggressive one, but a salary comparable to what an employee could get somewhere else. Offer equity in the company to all employees, so that they can reap the rewards of the company. Be aggressive in total overall compensation through the use of the incentives. If, for example, an employee is below market by $20,000 in base pay, deliver market parity via a $5,000 signing bonus; a $5,000 retention bonus; and a $10,000 incentive. Incentive programs should be designed so that high-performance people get high compensation.

48 Proficiency linked Pay Philosophy Some pay philosophies track the development of skills that lead to proficiency in a job. The more proficient an employee becomes the closer to market value he or she gets. This is a way of paying according to a market based on the value of skills

49 Program should be carried out consistently Program should be carried out consistently By law, pay practices must be consistent, must not discriminate, and must not be arbitrary. Yet a pay philosophy may include different approaches for different types of employees. For example, a company might decide to pay a competitive rate for most jobs and an aggressive rate for jobs that are especially difficult to fill and important to the bottom line.

50 Communication is part of retention in Pay Philosophy Employers benefit from communicating their pay philosophies to employees, because a sound philosophy consistently applied creates a sense of fairness. Some companies advertise their pay structure as a recruitment and retention strategy. If a company publishes its pay philosophy anywhere, it should also tell any employee who asks. Job candidates should also be aware of a company's pay philosophy. If a company doesn't have a pay philosophy, it will be easy to tell during the salary negotiation. Some companies even publish the philosophy in an employee handbook, and show employees where they are in relation to market. It makes more sense, during a salary negotiation, for an employer to say, "My final offer is $67,000, which is 100 percent of market," than it does to say, "My final offer is $67,000, and I can't pay a cent more

51 Diverse organizational strategies and cultures require different rewards and personal strategies. Usefulness of different reward and personal strategies depends on the organization situations. Business strategies effect reward strategy but at organization level employees will put a reciprocal effect that is they will also effect business strategies at different levels in organizations.

52 Components of a Fair Compensation System To operate a compensation system that promotes fair treatment, an organization should consider: 1. Relating job worth to differences in job requirements 2. Recognize the worth and value of employees knowledge and skills 3. Reward employee contributions and the results achieved

53 5. Support team and work units cooperative efforts 7. Design compensation plans that successfully compete within the established labour markets. 8. Align compensation of all employees with objectives and goals of the organization 9. Provide a compensation package that enhances current lifestyles and provides long term protection for employees and their dependents.


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