Compensation & Rewards

Management
 Compensation
Compensation is a systematic approach to
providing monetary & non- monetary value to
employees in exchange of work performed.

An aggregate of all rewards and remunerations

offered in either cash or kind in return of
services provided as per terms and conditions of
employment.
 Compensation Framework

Should ensure Should Should Should recognize

Should drive
internal equity acknowledge differentiate basis individual
business goals
and external regulatory and talent profile and performance and
and objectives
parity market guidance competence contribution
 Forms of Pay
Total Returns

Total Compensation Relational Returns

Cash
Benefits
Compensation

Recognition Challeng
and status ing work Learning
opportu
Employ nities
ment
Short security
term
Merit / Income Work
and long Allowan
Base Cost of protecti life
term ces
living on balance
incentiv
es
 Pay Model
POLICIES TECHNIQUES OBJECTIVES

ALIGNMENT
Work Description Evaluation / INTERNAL EFFICIENCY
Analysis Certification STRUCTURE Performance
Quality
Customer and
Market Surveys Policy PAY Stockholder
COMPETITIVENESS
Definitions Lines STRUCTURE
Cost

Seniority Performance Merit INCENTIVE FAIRNESS

CONTRIBUTIONS Based Based Guidelines PROGRAM

MANAGEMENT Cos t Communication Change EVALUATION COMPLIANCE

 Compensation Objectives
• Fairness

fair treatment for all employees by recognizing both

employees contribution and employee needs.

• Compliance

• Efficiency

Objectives guide the design of the pay system

Pay system should consider the external competitiveness and

internal alignment

Compensation should be according to ethics.

 Four Policy Choices
Internal Alignment

• Comparison of jobs or skill levels inside a single organisation.

• Jobs and people skills are compared in terms of their relative

contributions to the organization's business objectives.

• This is both for employees doing equal work and dissimilar

work.

• Internal Alignment affects all the three compensation

objectives.

External Competitiveness

• Comparison with competitors includes pay mix

 Four Policy Choices
Employee Contribution

• Performance based / Seniority based

• Eaton and Motorola – Team based pay

• Performance based pay – employee needs to understand the

basis for judging the performance.

Management

• Ensuring that the “right people get the right pay for achieving

the right objective in the right way”

Factors Influencing Employee
Compensation
Labour Market

External Factors Cost of Living

Labour Unions

Labour Laws

Economy
 …cont

Internal Factors Business Strategy

Job Evaluation and

Performance Appraisal

Employee
Compensation Model
 Compensation Philosophy
A compensation philosophy is the formal statement or commitment an organization
creates in regards to the compensation of their employees. The transparency of this
commitment benefits both the employee and the organization when it comes to pay
strategy and salary negotiations. Compensation philosophies usually are developed with
teamwork between human resources and executives.  The key factors to be considered
when creating a compensation philosophy can include the:

• Organization’s financial position,

• Size of the organization,
• Type of industry,
• Organization’s objectives,
• Salary comparisons with the competition, and
• Level of talent currently in place and needed for success.
The main goal of a compensation philosophy is simple: attract, retain and
motivate employees.
 Compensation Strategy
A strategic perspective focuses on those
compensation choices that help the organization
gain and sustain competitive advantage.

• Lead the market: positioning at 75th percentile

• Lag the market: positing at 25th percentile
• Match the market: positioning at 50th
percentile
 Pay Model guides Strategic Pay
Decisions
• Objectives
• Internal Alignment
• External Competitiveness
• Employee Contributions
• Management
Developing A Total Compensation
Strategy
 Compensation Equity
Compensation equity essentially means that employees believe that their pay is basically equal to
the value of their work. It also means that employees that have equivalent responsibilities with
about the same degree of knowledge, skills, experience, productivity and seniority are paid about
the same.

Employees consider two things when assessing whether their own compensation is fair.

• How their compensation compares to their co-workers : Internal Equity

• How their compensation compares to those employed in similar roles in other companies :
External Equity

Perceived inequity or unfairness can result in low morale and loss of organizational effectiveness.
For example, if employees feel they are being compensated unfairly, they may restrict their
efforts or leave the organization, damaging the organization’s overall performance.

At the end of the day, equity is in the eye of the beholder. If employees feel respected and heard,
they are more likely to perceive their treatment as fair. To foster a sense of both internal and
external equity, the best an employer can do is follow sound compensation design practices and
strive to build an environment of mutual trust.
 Compensation Equity- Internal
Internal Equity is the term used to describe fair compensation with
respect to how different positions within the organization relate to
each other. It is the relative ranking of all jobs to each other based on
their value to the organization. Internal job to job comparison is
based on job Analysis, job Descriptions and job Evaluations.

An internal equity study can determine if there is equity between

like-positions and if all roles in the organization are governed by the
same compensation guidelines. 

Job evaluation is the process of determining the value of a job within

an organization relative to all the other jobs in that organization.
 Compensation Equity- Internal
Pay structure refers to the array of pay rates for
different work or skills with in a single organization.
The number of levels, the differentials in pay
between the levels and the criteria used to
determine those differences describe the
structure.
Supports Organizational Strategy
Supports Work Flow
Motivates Behaviour
Example: Engineering Structure at Lockheed
Martin
Example: Managerial levels at General
Electric Plastics
Structures vary among Organizations

Levels

Differentials

Criteria
Example: Pay Structure at Lockheed Martin
 Job- and Person Based Structure
• Job-based structure relies on the work content –
tasks, behaviors, responsibilities
• Person-based structure shifts the focus to the
employee
– Skills, knowledge, or competencies the employee
possesses
– Whether or not they are used in the particular job
• Note the difference, in that both structures may incorporate
skill
– Job-based: skills required to perform job
– Person-based: skills possessed by person
Example: Engineering Structure at Lockheed
Martin
Example: Managerial levels at General
Electric Plastics
Factors Shaping Internal Structure
Strategic Choices in Designing Internal
Structure

Tailored versus Loosely Coupled

Egalitarian versus Hierarchical

 Which Structure is Better??

Layered DE layered
Chief Engineer
Engineering Manager Chief Engineer
Consulting Engineer
Senior Lead Engineer Consulting Engineer
Lead Engineer
Senior Engineer
Associate Engineer
Engineer
Engineer Trainee
Theories Affecting Compensation
Equity- Internal

Equity Theory: Fairness

Tournament Theory

Institutional model