The Importance of Compensation

Impacts an employers ability to attract and retain

employees.
Ensure optimal levels of employee performance in
meeting the organizations strategic objectives.
Compensations components
Direct compensation in the form of wages or salary
Base pay (hourly, weekly, and monthly)
Incentives (sales bonuses and or commissions)
Indirect compensation in the form of benefits
Legally required benefits (e.g., Social Security)
Optional (e.g., group health benefits)
 Introduction
Compensation is a systematic approach to
providing monetary & non monetary value
to employees in exchange for work
performed.
Compensation may be defined as money
received in performance of work and many
kinds of benefits that an organization
provides to their employees.
 Objectives
To recruit & retain
qualified employees.
To increase or
maintain morale.
To determine basic
wage & salary.
To reward for job
performance.
Compensation component
 component
Direct compensation
Base Pay

Bonus

Long term incentives

Perks or perquisites
 Cont
Indirect compensation
Insurance (health, eye).
Leaves (sick,
holiday/personal)
Clothes
Company parties
Phones/laptop
Retirement programs
 Non monetary
Enhance dignity & satisfaction from work
performed.
Promote social relationship with co-workers.
Allocate sufficient resources to perform work
assingments.
Offer supportive leadership & management.
Enhance physiological health, intellectual
growth.
 Factor affectting
COmpensatoion
External Internal
Demand & supply Compensation
of labour policy
Cost of living The org. ability to
Society pay
Labour unions Job analysis &
The economy description
Employee
 Theory Behind Compensation
Equity Theory
Comparing inputs and outputs of a similar co-worker
Perceived inequity affects employee effort

Expectancy Theory
People are motivated by intrinsic and extrinsic outcomes they
desire.
People will only be motivated if outcome is possible.
People will only be motivated if outcome is contingent.
 Equity Theory
Internal equity
Comparison of my input / reward ratio with that of similar
others.
Employees may seek to address imbalance by changing
their inputs.
Fairness of pay differentials between different jobs in the
organization can be established by job ranking, job
classification, point systems and factor comparisons.
External equity
Fairness of organizational compensation levels relative to
similar jobs in other organizations.
 Equity Theory
Fairness about pay differentials among
individuals who hold the same job can be
established by using:
Seniority-based pay systems that reward longevity.
Merit-based pay systems that reward employee
performance.
Incentive plans that allow employees to receive part of
their compensation based on their job performance.
Skills-based pay systems.
Team-based pay plans that encourage cooperation and
flexibility in employees.
 Types of Base Pay Systems
Job-based
Pay the job (not the person)
Market-based (external equity focus)
Point factor-based (internal equity focus)
Skills / knowledge-based
Pay the person (not the job)
62% of F1000 firms used some type of skill based
pay in 1999
 Compensable Factors
Characteristics in the job that the organizational
values and that help achieve its objectives.
National Position Evaluation
Hay Factors Plan (MAA)
Know-how Skill
Problem solving Effort
Accountability Responsibility
Job Conditions
 Pay for Performance Requires
1. Definition of performance
How are we going to measure and compare people?

2. Distribution of performance
Can we distinguish high and low performers?

3. Decide the increase for each level of performance.

How large a difference between high and low
performers?