Compensation Management

 Payroll involves large sums of money

 Pays systems are therefore an intergral
part of the business strategy
 The pay debate as to whether the best
way of rewarding service is through pay is
far from settled.
 Objectives of compensation
system
 A large sum of money is invested in
people
 Design rests on what must the company
achieve.
 System therefore needs to attract good
employees by structuring packages that
tempt people to do the job
Achievement of the objectives are
determined by :
 Labour markets forces
 Collective bargaining
 Government legislation
 Top managements philosophy regarding
pay
 Top managements willingness to
recognise ability and effort
Designing a compensation
system
 Traditional way of paying was done by
ignoring the interaction of organizational
members and buying employees time by
the hour.
 NO Incentives, rewards etc
 Today we value employees.
 In a rewarding environment , people work
hard.
The rewarding environment
includes
 How does this benefit practice benefit the
organization ?
 Does the benefit offset the administrative
costs?
 If we discontinued this practice, would that
adversely affect the organization’s
performance?
 This gives off a holistic picture of the org.
11.3.1 Elements of total
compensation
 Direct compensation is the fixed pay an
employee receives on a regular basis,
either in the form of a salary or as an
hourly wage.
 It includes cash incentives and various
share offers from employers.
 The defining factor is that it has a cash
value.
Elements of total compensation
 Designed to reward employees for good
performance.
 Can be monetary or non-monetary.
 Can also include medial aid, pension, providen
fund,UIF, etc.
 Perquisites or perks are a special category of
behefits and are only available only to
employees with some special status, such as
upper – level managers.
 Principles of value –chain
compensation
 Companies need to look at compensation as a
value-creating function.
 It creates value for the organisation and
employees.
 Balances the four major compensation
objectives which include:
 Sustaining management
 Motivating performance
 Building employee commitment
 Encouraging growth in employee’s skills
Principles of Reward Strategy
 Pay for performance
 Links to other levers of organisational change such as
providing recognition when deserved
 Reward measurable competencies
 Match incentives to the company culture
 Keep incentives clear and simple
 Over-communicate the reward strategy for the best results
 The greatest incentive is the work itself as employees
want to be recognised for the work they do and the
contributions they make
Model for compensation system
Analyse present compensation structure

Formulate salary policies

Select compensation system

Develop implementation plan

Evaluate and monitor

Job- Based compensation plan route
Conduct job analysis

Identify compensable factors

Develop a job hierarchy

Construct job grades

Carry out compensation survey

Establish final pay policy

 Traditional Pay Systems
 Traditionally people were paid primarily
through base salaries determined by
specific job, the need to maintain a certain
level of internal pay equity an the need to
pay externally competitive salaries.
 Employees were not encouraged to
develop skills.
 This had to change
 Emerging Pay Systems
 Pay for knowledge and skills
 Pay for competencies
 Performance based pay
 Incentive pay systems
 Broadbanding = rather than climb up through a
series of grades, employees might spend most
of their careers in a single band moving laterally
and acquiring new knowledge and competence.
Useful in ‘boundaryless’ organisation.
 Employee Benefits
 Items in the total package offered to
employees over and above salary which
increase their wealth or well-being at
some cost to the employer
 Mandatory Benefits
 UIF
 Compensation for injuries and diseases
 Voluntary Benefits
 Most of these benefits have certain legislative mimimums.
 Vacation leave
 Paid public holidays
 Time for personal matters
 Sick leave
 Maternity leave
 Health and life insurance
 Medical Aid Schemes
 Pension Funds
 Employee Services e.g.. Canteens, social and recreational
services
 Benefit Planning and flexible
benefit plans
 Establish objectives
 Collect complete descriptive data on the current workforce
 Determine how much money is available in the budget
 Determine what programmes fit your objectives, your workforce and
your budget
 Determine what your employees need and want
 Decide what you will provide and what you will actually spend in
total
 Determine options and costs, of admin, management and
communication
 Plan how the above will be accomplished
 Implement the above
 Advantages of flexible benefits
programme
 The company can set the sum total of benefits
for each employee
 The changing needs of the workforce are
catered for
 Employees take ownership for their choice of
benefits by satisfying their own unique needs
 It is less costly for the organisation when an
employee adds a new benefit
Disadvantages of flexible benefits
 Without proper assistance employees can
make bad choices and find themselves
not covered for emergencies
 Company administrative costs increase
 The cost of some benefits may increase
as a result of a majority of employees
choosing the benefit
 Calculating the costs of employee
benefits
 The total annual costs of benefits for all
employees
 Cost of benefits per employee per annum
 Percentage of the payroll (total costs of
benefits divided by the annual wage)
 Costs per employee per hour
 What to consider when
considering costs
 There is little evidence that benefits really encourage
improved performance, or increase employees’ job
satisfaction
 Costs of employee benefits and services have
increased dramatically
 Employers are required by law to introduce certain
programmes
 So-called voluntary programmes are constantly under
pressure from labour unions, competitors and the
industry to improve on employee benefits and services
 Benefits Strategy
 The pace-setter
 Comparable benefits
 Minimum benefits
 Compensation systems and
quality assurance
 Compensation benefits will shift towards base
rates with top-up incentives based on
performance, such as gain share,profit share etc.
 Increased flexibility will become evident in
remuneration packages.
 Remuneration packages will become more tax-
effective.
 Remuneration will be linked to teams rather than
to individuals