Introduction to Compensation

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 Concept of compensation and definition

compensation is a systematic approach to provide monetary value to

employees in exchange for work performed. It is a tool used by
management for a variety of purposes to further the existence of the
company.

It may be adjusted according to the business needs, goals and available

resources

Compensation may be defined as money received in performance of work

and many kinds of services and benefits that an organization provides to
their employees.
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Compensation is what employees receive in exchange for the services rendered in an organization. The term
‘compensation’ refers to all forms of financial returns and tangible benefits that employees receive as part of
the employment relationship.
Compensation refers to a wide range of financial and non-financial rewards to employees for their services
rendered to the organization.
It is paid in the form of wages, salaries and employee benefits such as paid vacations, insurance, maternity
leave, and free travel facility, retirement benefits, etc. monetary payments are direct form of compensating the
employees and have a great impact in motivating employees.
Compensation Management is designing and implementing total compensation package with a systematic
approach to providing value to employees in exchange for work performance,
•Compensation is a systematic approach to providing monetary value to employees in exchange for work
performed.
•Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.
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 OBJECTIVES OF COMPENSATION
• To recruit and retain qualified employees.

• To increase or maintain morale/satisfaction.

• To motivate employees for better performance.

• • To determine basic wages and salary administration.

• To achieve internal and external equity.

• To ensure equal pay for equal work, that is, each individual's pay is fair in
comparison to that of another person doing a similar job.

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 OBJECTIVES OF COMPENSATION continued

• To support, communicate and reinforce an organization's culture, value and

competitive strategy.

• To reduce turnover and encourage company loyalty.

• To reward for exceptional job performance with plans including bonuses,

commissions, profit sharing, stocks, gain sharing etc.

• To control cost - A rational compensation system helps the organization to obtain

and retain workers at a reasonable cost.

• Comply with legal regulation -A sound wage and salary system consider the legal
challenges imposed by the government and ensures the employees compliance.
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 IMPORTANCE OF COMPENSATION PROGRAM

• To the employer; because it represents a significant part of his cost, is

increasingly important to his employee's performance and to
competitiveness and affects his ability to recruit and retain a labour
force of quality.

• To the employee because it is fundamental to his standard of living and

is a measure of the value of his services or performance.

• To the government; because it affects the aspects of macroeconomics,

stability such as employment, inflation, purchasing power and socio-
economic development in general
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n
Importance
Image Building
Ensure Equity

Institutional Legal
effectiveness Compliance

Effective
Attract talent Compensation Administratively
Efficient

Motivate & Reward Valued

Retain Staff Behavior
Employee
Management
FACTORS THAT INFLUENCE COMPENSATION PRACTICES
Compensation, in its broadest sense - the perspective that managers must take in the global economy – is at the very heart
of every organization’s performance potential. Compensation provides the point at which organizational and individual
priorities and goals meet, encouraging the contentment of both parties. It provides the driving force for effectively attracting
needed human talent, retaining that talent and encouraging the talent in enduring persistent, enviable and enhanced
performance.

EXTERNAL FACTORS ORGANIZATIONAL FACTORS INDIVIDUAL FACTORS

Demand & supply of labor Compensation budget Performance in interview
Industry Standards Relevant domain expertise and
Cost of Living experience
Government Local talent Vs. Relocation Relevant industry experience
Prevailing wage rates Ability to Pay Last drawn salary
Labor Unions
Unionization Potential & attitude of candidate
Kind of Business
Labor/Capital intensive Name & Brand of institute studied
  Management philosophy Productivity of workers
Geographical Location
  Employees tenure & performance
  Profitability Kind of Job performed
  Size of the company Workers capacity 8
 Total compensation package
Compensation or rewards (incentives) can be classified into:

(a) Direct compensation includes money, popularly known as basic salary or

wage, (gross pay) where the individual is entitled for his job, overtime work
and holiday premiums, bonuses based on performance profit sharing and
opportunities to purchase stock option

(b) Indirect compensation includes benefits that may consist of life,

accident, health insurance, the employers contribution to retirement
(pension), pay for vacation or illness and employers are required to make
payments for employees welfare as social security.
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(c) Non-monetary compensation can include any benefits an employee
receives from an employer or job that does not involve tangible value. This
includes career and social rewards such as job security, flexible hours and
opportunity for growth, praise and recognition, task enjoyment, friendships .

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 CORE COMPONENTS OF COMPENSATION

The total compensation package may be described in many ways,

but is basically classified into various components

Components of Direct Compensation

(A) Base pay/Basic Salary.

(B) Bonus - It is mainly a gift given occasionally to reward

exceptional performance

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 Components of Direct Compensation CONTINUED
(C)Long-term incentives or stock options -An executive is given the right
to purchase the company's share at a fixed price.

(D) Perks or perquisites -Perks constitute a major source of income for

executives. In addition, to the normally allowed perks like provident fund,
gratuity executives enjoy perks such as vacation travel, membership in
club and well-furnished houses. In many cases, companies take care of
servants, telephone bills and even car fuel.

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 Components of Indirect Compensation
• Flexible working schedules.

• Elder care

• Retirement programs

• Moving expenses

• Insurance (health, eye, dental)

• Subsidized housing

• Paid leaves (sick holidays/personal days)

• Subsidized utilities

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 Components of indirect compensation continued
Tickets to events (ball games, concerts)

• Magazines subscriptions

• Boots and clothing

• Laundry services

• Company parties

• Use of machinery, farm produce goods/meals

• Cellular phones/pagers

• Child care.
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 Components of Non-monetary benefits

• Job responsibilities,

• Competent supervision,

• Offer supportive leadership and management,

• Comfortable working conditions

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 The wage determination process

Usually, the steps involved in determining wage rates are: performing

job analysis, wage surveys, analysis of relevant organizational problems
forming wage structure, framing rules of wage administration,

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 THE WAGE DETERMINATION PROCESS

1. The Process of Job Analysis: Results in job descriptions lead to job

specifications Based on this rating or evaluating the job occurs. A job is
rated in order to determine its value relative to all the other jobs in the
organization which are subject to evaluation. By converting the relative job
values into specific monetary values price of the job is found

2. Wage Surveys: Once the relative worth of jobs has been determined the
actual amounts to be paid must be determined. This is done by making wage
or salary surveys in the area concerned. surveys seek to answer for how
much other firms pays.

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 THE WAGE DETERMINATION PROCESS- continued

3. Other Relevant Organizational Problems: In addition to the results of job

analysis as like traditional payment mind set of people changes due to job
evaluation need to be understood

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 THE WAGE DETERMINATION PROCESS- continued

4. Preparation of Wage Structure: For this, several decisions need be taken, as: (a) whether
the organization wishes, or is able, to pay amounts above, below, or equal to the average
in the community or industry; (b) whether wage ranges should provide for merit increases
or whether there should be single rates (c) the number and width of the 'pay grades' (d)
which jobs are to be placed in each of the pay grades; (e) the actual money value to be as
signed to various pay grades;(f) differentials between pay plans; (g) what to do with
salaries that are out of line once these decisions have been made.

5. WAGE ADMINISTRATION RULES

Rules have to be developed to determine to what degree advancement will be based on

length of service rather than merit; with what frequency pay increases will be awarded;
how controls over wage and salary costs can be maintained; what rules will govern
promotion from one pay grade to another,
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