What is Compensation Management? Compensation Management, a basic function of the Human Resource Management, is administering the wage, salary, rewards, and benefits of the employees in the organizations.

Key concepts to discuss: 1. Difference between intrinsic and extrinsic compensation 2. Concept of equity in compensation 3. Concept of pay and different types 4. Job Evaluation 5. Pay Structure

How Compensation Management Works Reciprocity based reward Performance-based reciprocity reward Membership-based reciprocity reward Minimal performance level Useful for attracting & retaining employees Extraordinary performance level Needed for extra performance

Minimum performance level

Payment of rewards to the employees aims at to: Attract and retain the employees to / in the org. To meet and exceed the quantity and quality standards; To encourage innovations in order to improve productivity; To promote dependability and loyalty among the employees.

Kinds of Organizational Compensation Organizational Compensation Extrinsic or Core Compensation Intrinsic Compensation

Intrinsic Compensation Intrinsic compensation includes all the activities that have an impact on the intellectual, emotional and physical well being of the employee and is not specifically covered by the extrinsic compensation system.

Enhancing Dignity and Satisfaction from Work Performed Possibly the least costly and one of the most powerful reward an organization can offer to the employees is to recognize them as useful and valuable contributors. This kind of recognition leads to employee feelings of self-worth and pride in making a contribution.

Every compensation and non-compensation reward component should carry with it the message, “We need you and appreciate your efforts.”

Safe Working Conditions Provision of safe equipment; a work environment that is as risk-free as possible; minimization of noxious fumes; avoidance of extreme heat, cold, and humidity conditions; and elimination of contact with radiation and other disease-related materials are expected by all employees.

Promoting Constructive Social Relationships with Co-workers In this world of extreme specialization, people need and rely on other people more than ever. A workplace environment where trust, fellowship, loyalty, and love emanate from the top level of management to the lowest levels of the organization promotes the kind of social interaction most people need in order to thrive.

So, one of the inexpensive but most valued rewards offered through working is the opportunity to the employees to interact in a socially constructive manner with other people to enjoy the comradeship of workplace associates.

Designing Jobs that Require Adequate Attention & Effort As against “Scientific Management”, new approaches to improve the quality-of-work- life are needed. Employees need to have more voice in how their jobs should be structured and performed.

Restructuring of job tasks and flexibility in job requirements through rotating the work assignments and by giving employees more opportunity to perform their assignments in their own ways, are among the non- compensation rewards that are believed to enhance the output as well.

Allocating Sufficient Resources to Perform Work Assignments To make work satisfying, employees must not be placed in a no-win situation. To produce certain kinds and quantities of output, they must be provided with sufficient resources. Management must be careful about: Does the employee have the time to perform the assignment? Are the necessary human, technical, or physical resources available to them? Has the organization assisted the employee to gain the knowledge and skill necessary to perform the assignment?

Providing the Career Growth It is responsibility of the organization to provide the employees clear career paths and enhance their employability.

Extrinsic Compensation Total Compensation package Base Pay Wage & Salary Add-ons Services & Benefits Deferred Payment Overtime Shift differentials Premium payment for working on holidays & weekends Burdensome, distasteful, hazardous work (Radiation, fumes, dust, excessive heat/cold, noxious odors) Pay for work not done Incentive Payments Accommodation Medical Facilities Group Insurance Conveyance Others Pension Plans Social Security Plan Savings & Thrift Plan Supplemental Income Plan Others

Concept of Equity in Compensation The concept of equity refers to a comparison of a ratio of outcomes to inputs of a person on the job with the ratio of outcomes to inputs of a comparison person or generally called referent other. The comparison person may be another person on the same job engaged in direct exchange to the individual, a member of the same occupation, or even some composite of several comparison persons.

Two important aspects relating to equity should be recognized. The conditions necessary to produce equity or inequity are based on the individual’s perception of inputs and outputs vis-à-vis those of referent others. The objective characteristics of the situation are of less importance than the individual’s perception. Inequity is a relative phenomenon. Same amount received can be a source of satisfaction in one situation and a source of dissatisfaction in the other.

Magnitude of equity in compensation No factor has a greater effect on emotional reactions of employees than perception of fairness and equity. The experience of inequity is very distressing and people will try several strategies for bringing the ratios back into alignment. ◦ Adjusting ones inputs (putting in lesser efforts). ◦ Adjusting one’s outputs (resorting to unfair means of output). ◦ Changing the comparison person ◦ Leaving the situation

Types of Equity Inter-person Equity Intra-person Equity

Inter-person Equity Inter-person equity is said to exist whenever the ratio of person’s outcomes to inputs is equal to the ratio of outcomes to inputs of referent others. O pO o -----=----- I pO i

Inter-person inequity exists whenever two ratios are unequal O pO o -----<-----Inequity, under reward I pI o Or O pO o ----->-----Inequity, over reward I pI o

Inter-person equity Model Education Training Skills Experience Age Present performance Level of difficulty Time span Amount of responsibility Perceived pay of referent others Actual pay received Perceived job characteristics Perceived personal job inputs Perceived input of referent others Perceived amount that should be received (a) Perceived pay received relative to others b a=b satisfaction a>b dissatisfaction a<b guilt, discomfort, more effort

Different dimensions of Inter Inter-person equity has two dimensions: ◦ External Equity – how fairly one is being treated vis-à-vis the market rates. External equity can be realised through market surveys. ◦ Internal Equity – how fairly one is being paid vis-à-vis different internal parallel jobs. Internal equity can be realised through job evaluation.

Intra-person Equity Intra-person equity warrants a balance among different factors and aspects relating to the job that determine the level of the job assignment. The debate is based on the following propositions. ◦ Every worker is endowed with a specific level of capacity for work (C). This capacity varies across people. ◦ Each job to be performed demands a specific level of capacity (W). ◦ Every job has a rate of pay that is fair to be paid for that job. It corresponds to each job’s demand to get performed (P).

So equity will prevail if the demands of the job, capacity of the individual to perform that job and pay level are in harmony. C W P

Reasons of intra-person inequity Conversely, as shown in the following diagram, a variety of ways that inequity can develop. C W P P W C C WP 4. C WP 5.WC P 6.WC P

Examination of these possibilities demonstrate the following. People can be assigned to jobs that do not correspond to their capacities. Wages can be set that do not correspond to the level of work the job demands. Wages can be set that correspond to the level of work demanded by a job but not to the individual’s capacity for work.

Discussion Questions 1. Define the term Intrinsic Compensation. Why it is as much important as core compensation? Discuss various job and environment related factors that constitute the package of intrinsic compensation. 2. Describe the concept of equity in Compensation with all its aspects. Why this concept is crucial for the Compensation Managers? 3. Define inter-person equity. With the help of a model explain how an individual reaches a perceptual conclusion regarding inter-person equity? 4. Define and explain intra-person equity. To what recruitment and placement related conclusions the discussion leads to?