compensation management

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Compensation Management


INTERNATIONAL HUMAN RESOURCE MANAGEMENT HRM is all about creating Competent Comfortable Confident work force With a view to contribute to the Organizational Personal/individual Social goals


EVOLUTION OF HUMAN RESOURCE MANAGEMENT The Commodity Concept The FOP Concept The Paternalistic Concept The Humanitarian Concept The Behavioral Human Resource Concept The Emerging Concept


HUMAN RESOURCE MANAGEMENT Resources need to be Collected Coordinated Utilized through human Success or failure of an organization depends upon the human For any organization to function effectively , it must have resources of human HRM is to secure the best from people by winning their wholehearted cooperation


CHARACTERISTICS OF HRM Pervasive force Action oriented Individually oriented People oriented Development oriented Integrating mechanism Comprehensive function Auxiliary service Inter-disciplinary function Continuous function

significance of hrm:

significance of hrm Significance for an enterprise Attracting and retaining Developing Securing willful cooperation Utilizing Ensuring the competent and dedicated team Professional significance Personal development Healthy relationships Allocation of work

significance of hrm:

significance of hrm Social significance Suitable employment Balance between jobs available and jobseekers Eliminate waste human resource National significance: Assignment???


functions HRP Job Analysis Staffing Indoctrination T&D PMS Career Planning Compensation Benefits Labor Relations Record Keeping

Why HRM:

Why HRM Globalization Profitability through growth Technology Intellectual Capital Change, Change and more change


functions Grievance procedures Disciplinary procedures Conflict resolutions Quality circles Participative Management Organizational Change and OD Absenteeism


introduction Money received in performance of work and many kinds of services and benefits that an organization provides to the employee Systematic approach to providing monetary value to the employees in exchange for the work performed A tool used by the management to further the existence of the organization Adjustable to the goals, available resources and needs of the business


introduction All forms of tangible benefits and financial returns that an employee receives as part of employment relationship Integral part of HRM that helps in motivating the employee and increasing the effectiveness of an organization by paying salary or wage


Wage/salary Remuneration for labor is wage Contractual income Piece or time, it is agreed upon before the product is sold Salary is calculated annually or monthly Earnings relates to the remuneration receives in cash and kind at regular intervals for the time worked with remuneration for time not worked Excludes social security and pension schemes


compensation Traditional system : follow the instructions Physical needs Job security, increments etc But now everything is changed Psychological needs are important Participative management Align to the business goals and strategies Monetary and non monetary benefits Competitive compensation


objectives Recruit and retain qualified people To have enthusiastic and delighted employees Motivation Retain skilled and talent staff Internal and external equity Reduce turnover Loyalty Equality and fairness in terms to pay to work Reward exceptional performances Control cost Compliance with legal regulation

Why :

Why Most important element in the employment relationship Equal interest to all Employer: cost, performance is important Employee: decent standard of living Government: employment, inflation, purchasing power It is fair if based on systematic components


components Job description : in writing responsibilities, duties, location, functions, can be individual or group Job analysis : JD is developed from JA Job evaluation: worth of job Pay structure : grades, standardizing the compensation Salary survey : may purchase or conduct your own Policies and regulations : fair compensation, internal and external equity Total compensation package Direct compensation Indirect compensation Non monetary compensation

Core components Direct compensation:

Core components Direct compensation Basic pay : first component. determined according to the level of skill, effort and responsibility required to perform the job Bonus: for an exceptional performance, gift, reward, for special occasions, short term a gift over and above what is normally due as remuneration to the receiver 4 types of bonus Production bonus Bonus as an implied term of contract between the parties Customary bonus Profit bonus: statutory recognition in payment of bonus Act , depends on profits in a relevant year, executives deserve more than non managerial staff

Direct compensation:

Direct compensation Long term incentives or stock options: right to buy a piece of business Perks : in addition to normally allowed perks like PF, Gratuity it includes vacations, membership cards, well furnished houses, telephone bills, car fuel, driver, servants etc

Indirect compensation:

Indirect compensation Flexi hrs Elder care Retirement schemes laundry Tickets Child care Clothing Paid leaves etc

Non monetary benefit:

Non monetary benefit Praise and recognition Job responsibilities Working conditions etc

Non compensation system, henderson richard:

Non compensation system, henderson richard Non compensation system Enhance dignity and satisfaction from the work performed Grant control to meet the personal demands Promote constructive relationship among workers Allocate resources for work performance Leadership and management Enhance, physical health ,IQ,EQ and SQ Design requiring attention and effort


factors External Demand and supply of labor The Minimum Wages Act, 1948 Going rate Productivity Cost of living DA, Basic pay to remain undisturbed, sacrifice the merit pay Society Supreme Court keeps social and ethical considerations in adjusting wages and salary disputes Labor union Comparable pay---accurate labor market data Cost of living: COL allowance As per labor representation

Factors, External :

Factors, External Legislation The Payment of Wages Act, no irregularities and no unauthorized deductions The Minimum Wages act, 1948, State and Central Govt. to fix in sweated industries The Equal Remuneration Act, 1976 The Equal Pay Act, 1963 The Company’s Act, 1956 Wage Boards, Tribunals and fair wages committees

Factors, External:

Factors, External The economy Depressed Booming COL is used as pay standard, COL grows as economy expands Compensation survey Outsource or self Market rate is most important


factors Internal Compensation polices Fairness Maintain equity Pay leaders Market rate Pay followers Organizational ability to pay JA and JD employee

Job analysis:

Job analysis Systematic process of determining the KSA’s for performing the job Determine the task Classify, exempted and non exempted Model JD Finalize and document all JD’s Evaluate General task analysis by departments Verify ranking by comparing, change if required Prepare matrix Determine grades Establish levels Salary range, monetary range is determined


determinants What accounts for individual differences in pay within organizations???? Education Experience Performance Product market Labor market All play a crucial role in pay determination

Product market and labor market:

Product market and labor market Competitive disadvantage for a firm in the product market if the labor cost is high than those of competitors and such costs are reflected in high prices of products Hindustan Motors products has high labor cost than Maruti Udyog Competitive prices by HM is difficult Similarly labor market, competition is for technicians and managers also Lower pay level will be a problem In order to attract and retain labor

Fringe benefits:

Fringe benefits Remuneration received can not measure the contribution made, so other than salaries, certain supplementary services are available– fringe benefits Additional to regular wages and not a substitute Primarily for the benefit of an employee Which can be expressed in terms of cash Different from welfare services If no relation to the employment, it is not a fringe benefit


classifications For employee security: retirement plans, social security, unemployment compensation Increase satisfaction causing reduction in turnover: vacations, sick leaves, holidays, discounts on company’s goods and services Statutory : medical care, gratuity, PF etc Contractual : agreement, DA, HRA, city allowance, night shift allowance Voluntary : unilaterally by the company, incentive for family planning, washing allowance, suggestion rewards

Managing compensation:

Managing compensation The key designing any compensation is to develop the understanding of the forms, vision and direction Failure leads de motivation Guidelines begins from the top---examine better strategy and ends in proper implementation There are various steps that helps in designing performance based compensation strategy and designing organization design Use adequate incentive plans Those who are giving 100% may not show improvement but for middle and bottom level, opportunity for significant change


guidelines Focus on strategy objectives : support the strategic objectives and ensure compensation system that fits in. Keep into considerations the following questions: mission Strategic goals and objectives Do we have skill set presently? Individual or team Cost of replacement Desired turnover Organization strategy What should the we need to accomplish How do we compare etc……


guidelines Ensuring commitment through communication and participation Planning is important Be committed to the process Participation and communication to be clearly defined Compensation review committee for current issues Ideas and feedback


guidelines Analyzing job functions Job analyst type, responsibility and scope of the job Foundation for JD Enables organization to compare and establish their baseline information about job level of responsibility Compliance with legal requirements


guidelines Writing JD Before finalizing, received and accepted by both General nature of the work Tasks Responsibilities Outcome competency required


guidelines Determine internal equity fair pay Factor comparison technique, whole job ranking technique

Factor comparison :

Factor comparison Indentify the common factors Identify the jobs identify people who will be involved Common understanding among all for the factors


guidelines Determine external equity Market price slotting method Market competitiveness method is flexible and adaptable For gathering competitors pay rates Establish a timeline Select bench mark positions to survey Target the participants Design questionnaire Use secondary date and sources Follow up and verify answers with participants


METHOD competitive salary survey information job match, company size, industry, geography, and ownership. job position ,scope, complexity, and potential skill, effort, responsibility and working conditions required to successfully perform the job.


guidelines Design salary structure After market data collection and hierarchal ordering, salary structure can be designed Salary structure consists of jobs of equal value that are grouped into grades with competitive salary ranges Pay ranges are the rates from the min to max of each grade Positions are assigned to the grades and pay ranges based on job content Each salary range has max, mid and min range Mid represents going rate

Equity in compensation:

Equity in compensation Equity theory by J Adam People form equity belief on the basis of 2 factors Input Output Equity is judged on the basis of O/I ratio Referent Equity is O/I is equal to O/I of a referent Referent can be doing same job within same organization Same job in other organization Doing different job in same organization

Equity in compensation:

Equity in compensation Feeling of inequity Decreases input Raise in salary for output Distracts perceptions Attempt to change others Choosing a new referent Escape It leads to absenteeism, tiredness, work breaks or quitting Underpaid or overpaid

Compensation as retention strategy:

Compensation as retention strategy Retaining potential employees Reward right behavior—productivity and attraction and retention Top talent and be competent in market Mapping this information in the overall plan and budget ensures that programs add value Total compensation includes total reward approach

Compensation as retention strategy:

Compensation as retention strategy Effective performance management system Flexible work schedule Advancement opportunities Managing poor performance Terms and conditions are not a key, benchmark the salaries and benefits and communicate it to the employees Right person at a right job Career development Promotion

Competency based program :

Competency based program “ skill is nothing but a mere hoard of gold, till it is set to work” Competencies = KSA This model takes into consideration KSA in addition to ability and attitude Human is the most important resource Effective way of talent management over JD approach Transition from qualifications to performance Competency is used for identifying and developing the talent

Why Competency based program?:

Why Competency based program? Systems approach Every employee should be given a fair chance to do best---- how?? Provide them with the structure and discipline Change is inevitable--- cost effective approaches and shortages are leading to this approach—for higher performance This develops critical behavior and abilities which an employee needs for results Link compensation to individual contribution

Why Competency based program?:

Why Competency based program? Common language to HRM What interventions are needed to achieve the strategic objectives Parameters with which the company will use severance package Drive business results Retain key talent Increase competitive advantage But It has to be well planned, defined

Compensation policy:

Compensation policy Long term strategic vision Implement new initiatives and innovative concepts to solve the problems This new approach increases delegation, and increases efficiency


framework Document the position Evaluate the position value Remuneration range Conduct PA Review achievement And goals Review the position documentation Change the value Change remuneration rewards

Objectives :

Objectives Ensure equitable system Creating a structure and culture that facilitates performance Motivate the employees Attracting and retaining quality broad guidelines transparency

Employee contribution equity:

Employee contribution equity Is achieved when the pay fairly reflects the level of contribution Internal equity is pay relationships among the different jobs, skills in the same organization and pay is determined according to its worth Internal consistency: determine the overall importance and worth of job JE is based on informed judgments Firms have committees, seniors are the members--JEC

Performance appraisal:

Performance appraisal Run and steered by the people Success depends upon the sum total of the performance of the members Structured formal interaction between the supervisor and the subordinate A procedure to evaluate 3 P’s Personality Performance Potential of members

Overview of pa:

Overview of pa Allows management to specify what employees have to do, set goals while getting feedback Human judgment and information processing Easy to operate, maintain, administer and explain also Ratee should participate development Should be job related, sensitive, reliable, practical

Importance of pa:

Importance of pa Facilitates planning T&D demands Promotions Transfers Salary hikes Guidance and counseling Satisfaction

Pfp system:

Pfp system Pay for Performance refers to the strategy where evaluations of an individual, for organizational performance, have significant on the amount of pay increases or bonuses given to the employees If not well distributed, commitment decreases and so level of satisfaction Also known as incentive system Outstanding performance should receive great rewards Average should get small raises so that they get encouraged to do more

Pay for Performance:

Pay for Performance A strategy which emphasis on the performance evaluation system process that produces maximum gains Involves clarifying the goals and translating them into individual expectations---- continuous communication and checks

Objectives of Pay for Performance :

Objectives of Pay for Performance Improve the ability to attract and gain more people Improving individual efforts---organizational performance Fair may—those who contribute more, gets more Inducing performance oriented culture Compensation strategy gets linked to business strategy Motivational Upgrades the skills

Pay for Performance:

Pay for Performance It is complex Demands investment Flaws– design, implementation and operations Evaluation system should be accurate Trained and well versed Accountable for decisions Conflicts and competition is also there

Reward systems:

Reward systems Important attribute of an organization is its ability to pay rewards Pay Promotions Fringe benefits etc Why rewards?????????????? Effective performance Join the organization Come to work Motivate individually by making them realize their positional value

Principals of effective system:

Principals of effective system Give value to the reward system---preference---cash, name in the newsletter, public recognition etc Simple otherwise confusion Standards within control Ensure participation Empowerment


types Money Certificates Special assignments etc Wages Awards Benefits are common Increased earnings will not necessarily lead to great performance So what leads to satisfaction??????????

Incentives and rewards :

Incentives and rewards Incentives are Forward looking and rewards are retrospective Do this and you will get this-----incentive Tangible recognition ----indirect motivation is rewards Commission is incentive Team based lump sum payment is reward

Competency related pay:

Competency related pay Method is rewarding people wholly or partially by reference to the level of competency they demonstrate in carrying out their roles Pay is related to competency Reward as per the level of competence Competency analysis of the individual

Skill based pay:

Skill based pay Links pay to the level of skills used in the job and sometimes the application of additional skills used by the employee for carrying out the job If they are not cost effective, they need to be revised Manual workers, fitters, operators etc Competency is behavior and attributes required

Team based rewards:

Team based rewards Financial and non financial rewards to the members of formally established team Shared among the team on the basis of a scheme or ad hoc basis for exceptional contributions Are not easy to design, you need to understand the nature of the team members

Profit sharing:

Profit sharing Related to participative management theory Group based organized plan Why profit sharing??? ????? Identify themselves closely w.r.t organization Stimulate greater interest Better cooperation Educate employees about the financial health of the company Variable pay, adjustable cost

Gain sharing:

Gain sharing Formula based bonus plan Share the financial gain Aim is to Improve the performance by creating a motivated workforce Scanlon plan Rucker plan Impro share Principals on which gain sharing is based upon Ownership Involvement Commitment Encourages team work and cooperation by focusing the attention on performance

Difference between gain sharing and profit sharing:

Difference between gain sharing and profit sharing Rewards are based on productivity rather on profits Distribution is monthly or quarterly than annually Gain sharing does get deferred Not financial performance but cost index---labor cost, scrap cost etc

Lawler 1971 and 1990:

Lawler 1971 and 1990 Coordination, teamwork and sharing of knowledge Social needs recognition---participation Creativity—employees are producing ideas Change in the attitude Attention is on cost saving Acceptance rate is high Work smarter

Impro share------ type of gain sharing plan:

Impro share------ type of gain sharing plan Expected hrs required to perform a job Standard--- work measurement By pre-established formula, hrs saved---savings-----shared

Scanlon plan:

Scanlon plan Lower the labor cost without lowering activity Incentives on the basis of ratio between labor cost and sales value of production( SVOP)

Rucker plan:

Rucker plan Ratio is calculated to find out the value of production required for the total wage bill

Stock options:

Stock options Long term incentive plan HP and Pepsi grant them to every employee Widely used Right to purchase a specific number of shares at a specific price

Merit pay:

Merit pay Salary increases on the basis of PA by supervisor Clear performance reward relationship

Employee ownership:

Employee ownership Assignment??????????

Employee benefits:

Employee benefits Already covered

Effect of compensation on motivation:

Effect of compensation on motivation We talked about design and implementation + relationship exists between compensation and motivation:--intrinsic or extrinsic Also turnover and work satisfaction

Lawer porter model:

Lawer porter model Right person on the right job—match abilities and traits Carefully explain the roles and profiles Expectations Employee should value the rewards Fixed / variable

Certain conditions for motivation:

Certain conditions for motivation Belief by the employees---performance leads to rewards Rewards are attractive Their efforts would lead organization to grow

Challenges in pfp system:

Challenges in pfp system Competency based model JA : CB, KSA personal characteristics—linkage b/w job content, qualifications, experience and performance Not only for pay, JA is required but for staff mgmt Competency Develop assessments of staff members performance to the competency Price them using data and investigations Establish the salary

Challenges in pfp system:

Challenges in pfp system Effective pay model Combine fixed and variable compensation Setting a base salary an establishing a method of providing bonus based on certain performance Control operating costs Rewards right behavior Self management Innovation and operational efficiency Develop employee trust relationship Enhancement of employee participation Use of performance linked incentives

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