Compensation Management

Compensation
Compensation is what employees receive in exchange for their contribution to the organization. Pay Compensation Benefits Compensation refers to all forms of financial returns and tangible service and benefits employees receive as apart of an employment relationship

Compensation: Objectives
Internal equity

External equity
Individual equity Attract talent Retaining talent Compliance with legal rules Control costs

Purpose of Compensation
Contribution based Remuneration Attract talent
Effective Compensation

Ensure Equity

Institutionalized Processes

Administratively Legal Efficient

Compliance

Motivate & Retain Staff

Reward Valued Behavior

Compensation Management
Compensation provided to employees can direct

in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary but it is the sum total of all rewards and allowances provided to the employees in return for their services.

Types of Compensation Management

Direct Compensation

Indirect Compensation

Direct Compensation
Direct compensation refers to monetary

benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc.

Components in Direct Compensation

Basic Salary

DA
HRA (House Rent Allowance) CA (Conveyance Allowance)

LTA (Leave Travel Allowance)

Overtime pay Medical Reimbursement Bonus and incentives SA (Special Allowance) Profit sharing

Components in Direct Compensation

1) HRA (House Rent Allowance): Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees

Components in Direct Compensation

2) Conveyance : Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.

Components in Direct Compensation

3) Leave Travel Allowance: These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization.

Components in Direct Compensation

4) Medical Reimbursement : Organizations also look after the health conditions of their employees. The employees are provided with mediclaims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements

Components in Direct Compensation

5) Bonus: Bonus is paid to the employees during festive seasons to motivate them and provide them the social security . The bonus amount usually amounts to one months salary of the employee. This is apart from the salary.

Components in Direct Compensation

6) Special Allowance : Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees for motivation and companys Productivity.

Indirect Compensation
Indirect compensation refers to non-monetary

benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.

Components in Indirect Compensation

Leave Policy Overtime Policy Health Insurance Leave Travel Retirement Benefits Holiday Homes Flexible Timings

Components in Indirect Compensation

1) Leave Policy: It is the right of employee to get adequate number of leave while working with the organization. The Leave Policy differs in every organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, etc.

Components in Indirect Compensation

2) Overtime Policy : Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc.

Components in Indirect Compensation

3) Hospitalization : The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.

Components in Indirect Compensation

4) Insurance : Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization.

Components in Indirect Compensation

5) Leave Travel : The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free.

Components in Indirect Compensation

6) Retirement Benefits : Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.

Components in Indirect Compensation

7) Holiday Homes : Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house.

Components in Indirect Compensation

8) Flexible Timings : Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.

3-P Compensation Concept

Position

Person
Performance

The Pay Model

Business Goals Business Strategy Compensation Philosophy/ activities serve Business Objectives

CEO

Business Strategy This defines the direction in which organization is going in relation to its environment in order to achieve its objectives. Compensation Philosophy Consists of a set of beliefs which underpin the reward/compensation strategy of the organization and govern the reward policies that determine how reward processes operate

The Pay Model

Business Goals

CEO

Business Strategy

Compensation activities serve Business Objectives

Compensation Strategy Org.Structure Compensation Plan

Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

HR Head

Compensation Strategy defines the intentions of the organization on reward policies, processes and practices required to ensure that it has the skilled, competent and well-motivated workforce it needs to achieve its business goals

The Pay Model

Business Goals

CEO

Business Strategy

Compensation activities serve Business Objectives

Compensation Strategy Org.Structure Compensation Plan

Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

HR Head

A strategic perspective on compensation takes the

position that how employees are compensated can be a source of sustainable competitive advantage

The Pay Model

Business Goals

CEO

Business Strategy

Compensation activities serve Business Objectives

Compensation Strategy Org.Structure Compensation Plan Performance Management Job Evaluation Unit Inputs Pay levels / structures Total remuneration Performance linked Pay

Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

C & B/S M

HR Head

Market Surveys

Employee

Contribution /outputs

Compensation Manager, along with team is responsible for carrying out compensation related activities

Internal Equity

Individual Pay

External Equity

Employment Relationship in Compensation

TRANSACTIONAL Emphasizing the Cash &

Benefit Forms
RELATIONAL Emphasizing the Family / culture

/ Bonding Aspects

Employment Relationship in Compensation

TRANSACTIONAL
Low ----- High
HIGH PAY LOW COMMITMENT Hired Guns (Lehman Brothers) LOW PAY LOW COMMITMENT Workers as commodity HIGH PAY HIGH COMMITMENT Cult Like (Microsoft) LOW PAY HIGH COMMITMENT Family (Starbucks)

RELATIONAL

Low ----- High

Determination of Compensation: Steps

Find the worth of each job job evaluation

Find what other employees are paying for

comparable jobs Salary survey Grouping of similar jobs Pay grade Price each pay grade Fine tune pay rates

Job Evaluation
Four major methods used in job evaluation

Job Ranking Method Job Classification Method Point Method Factor Comparison Method

Job Evaluation Methods

Comparison Bases Means of Analysis
Entire Job Job Against Scale Classification Job Factors Point Method

Job Against Job

Ranking

Factor Comparison

Ranking Method
Straight ranking

Alternation Ranking

Paired Comparison

Ranking Method
Advantages Simple Alternation method ranks highest then lowest, then next highest, then next lowest Paired comparisons method picks highest out of each pair Fast Most commonly used

Disadvantages Comparisons can be problematic depending on number and complexity of jobs May appear arbitrary to employees Can be legally challenged Unreliable

Paired Comparison

Classification Method
Advantages Uses job families/groups instead of individual jobs May produce same results as Point Method, but is less costly Disadvantages Not useful when jobs are very different from each other May be confusing to employees about why jobs are included in a class

Compensable Factors
Must be present in all jobs

Factor must vary in degree

Should not overlap in meaning All stakeholders viewpoints must be reflected Should be demonstrable by the actual work

Factor Comparison
Compensable Factors used
Mental

requirements, Physical requirements, Skill requirements, Responsibility, and Working conditions

Factor Comparison Steps

Select key jobs representing wage/salary levels across

the organization Find the factors in terms of which the jobs are evaluated Ranked the selected jobs under each factor Assign money value to each factor and determine the wage rate for each key job The wage rate is apportioned along the factors All other key jobs and wage rates are determined

Factor Comparison Method

Advantages

Customized to the

organization Relatively easy to use once its set up Results in ranking of jobs and a specific rupee value for each job, based on allocating part of the jobs total wage to each factor

Disadvantages Using rupee values may bias evaluators by assigning more money to a factor than a job is worth Hard to set up Not easily explained to employees

Point Method
Select key jobs. Identify the factors common to all the

identified jobs skill, effort, responsibility Divide each major factor into a number of sub factors. Each sub factor is defined and expressed clearly in order of importance preferably along a scale Find the maximum number of points assigned to each job Once the worth of a job in terms of total points is expressed, the points are converted into money values

Point Method

Advantages Highly stable over time Perceived as valid by users and employees Likely to be reliable among committee that assesses the jobs Provides good data to prepare a response to an appeal

Disadvantages Time, money, and effort required to set up Relies heavily on key (benchmark) jobs, so if key jobs and correct pay rates dont exist, the point method may not be valid

What is a Degree Level?

It is a scale that reflects differing quantity or

quality of the factor It is used to differentiate jobs on the factor It is a definition that is clear and unambiguous It contains explicit language that spells out the behaviors, skills, or performance expectations for that factor at different levels of the factor

How Do You Develop Degrees?

1.

Degrees should be selected so that each job falls at only one level. Note:
1. 2. 3.

you can include some degrees that do not apply to the current jobs if you feel there is too much of a jump between levels. Another reason to create "empty" levels is if you think new jobs will be created that will require that level in the factor. The number of degrees selected should be no more than are needed to differentiate adequately and fairly between all the jobs being rated.

2. 3. 4. 5.

Each degree should be clearly defined in terms the workers can understand. Avoid the use of ambiguous terms, e.g., strong skills, excellent. Definitions of degrees should be written in objective terms. In writing degree definitions, use examples as much as possible.

How Do You Assign Point Values to the Entire System?

1. 2. 3.

4.

5.

The maximum number of points assigned is a fairly arbitrary judgment (500-3000 is common) The number must be large enough to allow sufficient differentiation among the jobs to be evaluated. If there is a very wide spread between the current wages of the highest paid job and the lowest paid job, the maximum number of points will need to be higher If you choose more than one pay system, the number of points or the actual factors themselves do not have to be the same in each one. SUGGESTION /THUMB RULE: Have no fewer than 1000 points and no more than 2000.

How Do You Assign Point Values to the Degree Levels?

First, determine the number of points for

each main factor (e.g., 2000 total points for the system would result in 200 points for a factor weighted at 10%). Then use

The straight-line method, which simply takes the maximum points for a given factor and divides it by the number of degrees. Note: this method assumes that the degrees should be viewed as equidistant from each other

Position: Grade: MAXIMUM FACTOR POINTS 250 250 500 500 250 250 125 125 125 125 2500

Engineering Manager 7

FACTOR Communication & Interpersonal Skills Education & Training Problem Solving & Decision Making Responsibility & Accountability Specialized Knowledge & Application Supervision & Leadership Internal Impact External Impact Planning & Organizing Innovation

JE Points 250 250 400 500 200 250 125 75 125 90 2265

DEGREE LEVEL 4 5 4 4 4 4 3 1 4 2

FACTOR WEIGHTS 10% 10% 20% 20% 10% 10% 5% 5% 5% 5% 100%

How Do You Assign Point Values to the Degree Levels?

Or the accelerating method, where differences in degrees are seen as greater as you move up in that factor, and so the point differences reflect that jump, e.g., 27, 80, 160, 267, 400 Or the decelerating method, where differences in degrees are seen as smaller as you move up in that factor, and so the point differences reflect it, e.g., 133, 240, 320, 373, 400

Rememberthe highest level of a factor is always assigned the full number of points allocated to that factor, and the lowest level of a factor has to have some points assigned to it, i.e., 0 points is not permitted!

Payroll Management

Payroll Management
Payroll refers to the administration of

employees' salaries, wages, bonuses, net pay, and deductions. It consist of the employee ID, employee name, date of joining, daily attendance record, basic salary, allowances, overtime pay, bonus, commissions, incentives, pay for holidays, vacations and sickness, value of meals and lodging etc. There are some deductions such as PF, taxes, loan installments or advances taken by employee.

Components of Monthly Payroll of an Employee

Payroll Management
Deductions such as tax and loan/advances

taken by the employee from organizations are deducted only where applicable. Dearness Allowance and House rent allowance is provided at a fixed rate stated by the employment law. Provident fund is deducted from the gross salary of employee on the monthly basis as per the employment law, which is provided later to the employee. Organizations also contribute the same amount to the provident fund of the employee.

Annual Payroll Management

What is Annual Payroll? Annual payroll consists of leave travel allowances, incentives, annual bonuses, meal vouchers/reimbursements, and medical reimbursements.

Components of Annual Payroll

Incentive Management

Incentive Plans
Individual

Group
Organization

Incentive Management
In todays strategic compensation systems,

incentives forms an integral part of the performance based compensation packages. It is a challenge for organizations to formulate strategies to maintain the internal equity and external equity and provide the most competitive compensation packages to attract and retain the talented workforce

Incentive Management
For the purpose effective incentives programs

are undertaken. Employees are involved in the process so as to deliver un-biased packages to all the employees. The compensation strategies should be effective. All the employees should be aware of the organizational goals and objectives.

Benefits of Incentives
Deserving employees should receive

significant rewards . Incentives accounts for employees high productivity. Today youngsters believe in performance based pay, thus incentives will help to motivate them to produce more. In the hospitality and retail industry it is the incentive that accounts for the overall package of the employee.