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

Unit 1:
Purpose & Scope of Compensation
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)

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
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.

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
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.

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

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.

Companies Attract, Motivate &
Retain through Compensation
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, 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.

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.
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.
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
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.
Issues to be addressed:


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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
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
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Employee Compensation

Direct financial
payments

Indirect payments
◦ Payments in the form
of financial benefits
such as employer-paid
insurance and
vacations
◦ Payments in the form
of wages, salaries,
incentives,
commissions, and
bonuses
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Features of Pay Philosophy
Link reward
to Values and
Beliefs
Flowing from
Business
Strategy
Integration
with Business
Strategies
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

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.

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
Determining Compensation
Philosophies
Companies can choose from three pay
level policies:
 Market Lead:
 Market Lag:
 Market Match:

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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.

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.
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.
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.

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.

Types of Compensation
Job based
 Skill based
 Team based
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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.
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
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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.

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.
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.

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.
Distribution of Team Based
Incentives
1.
2.
3.
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.
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.
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.
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.
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.
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
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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
pay
- Person-focused
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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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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.
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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-forknowledge 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.
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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
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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.
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
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.

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
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.

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
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.