1. Purpose & Scope of Compensation
Unit 1:
Purpose & Scope of Compensation

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)
Organizational development professionals promote intrinsic compensation thorugh effective job design.
According to job characteristics theory: employees experirnce enhanced psychological states when their jobs rate high in thes five core job dimensions:

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 Characteristics
Critical Psychological State
Benefits to Employers
Skill variety, task identity, task significance
Experienced meaningfulness of the work
Lower turnover
Autonomy
Experienced responsibility for work Outcomes
Lower absenteeism
Enhanced job Performance
Feedback
Gained 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
Base Pay
Incentives
Benefits
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.
Base pay, also called salary;
Incentive pay, whether in the form of cash or non-cash award such as stock
Benefits, or non-financial rewards.

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
While base pay critically influences current lifestyles activites, benefits and services affect both current and future standards of living.

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. 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
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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
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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:
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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.
Used primarily to attract and retain qualified personnel important to production.

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.
This pay policy does not fit with the lowest cost strategy for obvious reasons

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.
There is no one size fit all ‘ approach to policy selection.

28. Types of Compensation Job based Skill based Team based
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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
Depth of skills refers too a level of specialization or expertise an employee brings to a particular job. Companies that use this type of pay policy are anufacturing companies.
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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
Equal incentive payments to all team members
Differential payments to team members based on their contribution to the team’s performance
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
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.
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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
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.
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42. 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.
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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.
Base pay is adjusted periodically for cost-of-living increases. COLAs are base pay adjustments tied to the consumer price index (CPI). They are designed to enable employees to maintain their purchasing power and standard of living. Seniority pay systems reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs. In merit pay systems, employees receive permanent base pay increases due to their job performance. Merit pay is designed to reward exemplary performance to motivate future performance.
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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.
Incentive pay is also known as variable pay. Incentive pay reward employees for achieving predetermined work objectives. Pay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula. Lastly, skill-based pay is used mostly for employees who perform physical work and increases as workers master new skills.
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45. Skill Based Pay Competency–skill-based pay Competencies
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
Competencies - demonstrable characteristics of the person, including knowledge, skills, and behaviors, that enable performance
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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
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:
Relating job worth to differences in job requirements
Recognize the worth and value of employees knowledge and skills
Reward employee contributions and the results achieved

53. 5. Support team and work units cooperative efforts 7
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.