compensation system
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COMPENSATION SYSTEMCOMPENSATION SYSTEM
IPMI-HRM-Krishnan Rajendran, 2010
What is Compensation?What is Compensation?
Employee compensation is the process of paying and rewarding people for the contributions they make to an organization.
Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work.
Compensation represents the total package of rewards—both monetary and nonmonetary.
Total CompensationTotal Compensation
DirectDirect IndirectIndirect
BonusesBonuses
Gain sharing, etc.Gain sharing, etc. Security Plans• Pensions
Employee Services• Educational assistance• Recreational programs
CommissionsCommissions
Wages / SalariesWages / Salaries
Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife
Time Not WorkedTime Not Worked• LeaveLeave• HolidaysHolidays• VacationsVacations
IPMI-HRM-Krishnan Rajendran, 2010
InternalEquity
ExternalEquity
EmployeeContribution
Job Analysis
Market Definition
Market Survey
Policy Decision
PerformanceAppraisal
Incentive Guidelines
Incentive Scheme
Policies Techniques
Internal Alignment
Competitiveness
Contribution
Internal Structure
Job Evaluation
Job Description
Pay Structure
Objectives
Efficiency
Fairness
Compliance
Pay Policy ModelPay Policy Model
IPMI-HRM-Krishnan Rajendran, 2010
Linking Compensation to Linking Compensation to Organizational ObjectivesOrganizational Objectives
Value-added Compensation◦Evaluating the individual components of
the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. “How does this compensation practice
benefit the organization?” “Does the benefit offset the
administrative cost?”
IPMI-HRM-Krishnan Rajendran, 2010
Common Strategic Compensation Common Strategic Compensation GoalsGoals1. To reward employees’ past performance2. To remain competitive in the labor
market3. To maintain salary equity among
employees4. To mesh employees’ future performance
with organizational goals5. To control the compensation budget6. To attract new employees7. To reduce unnecessary turnover
Comparison of Compensation Comparison of Compensation StrategiesStrategies
IPMI-HRM-Krishnan Rajendran, 2010
Strategic Framework for Employee Strategic Framework for Employee CompensationCompensation
IPMI-HRM-Krishnan Rajendran, 2010
The Compensation PackageThe Compensation Package
The compensation package represents the blend of rewards employees receive from the organization.
Money paid as wages or salary is the largest component of most compensation packages.
Benefits and short and long term rewards make up the rest of the package.
IPMI-HRM-Krishnan Rajendran, 2010
Common Elements of Common Elements of Compensation PackagesCompensation Packages
The main elements of the Compensation Package consist of:◦Base pay is a form of
compensation that is not at risk and may consist of an hourly wage or an annual salary.
◦Employee benefits, are rewards other than monetary salary and wages.
IPMI-HRM-Krishnan Rajendran, 2010
Elements of the Compensation Elements of the Compensation PackagePackage
Individual incentive is a reward that is based on the personal performance of the employee. Individual incentives are linked to performance behaviors and outcomes.
A group incentive is a reward based on the collective performance of a team or organization.
IPMI-HRM-Krishnan Rajendran, 2010
Combining Compensation Package Combining Compensation Package Elements.Elements.
IPMI-HRM-Krishnan Rajendran, 2010
HOW DO STRATEGIC DECISIONS HOW DO STRATEGIC DECISIONS INFLUENCE A COMPENSATION INFLUENCE A COMPENSATION PACKAGE? PACKAGE? The organization must decide
how much compensation to allocate to base pay, benefits, individual incentives, and group incentives in order to align pay to the organization’s broad HR strategy.
IPMI-HRM-Krishnan Rajendran, 2010
Strategic Compensation Process.Strategic Compensation Process.
IPMI-HRM-Krishnan Rajendran, 2010
Typical Compensation ElementsTypical Compensation Elements
IPMI-HRM-Krishnan Rajendran, 2010
HOW IS COMPENSATION LEVEL HOW IS COMPENSATION LEVEL DETERMINED? DETERMINED? It all begins with the pay survey.The pay survey provides information about how
much other organizations are paying employees. Pay surveys are conducted by consulting firms,
which obtain confidential pay information from numerous organizations and create reports that describe average pay levels in other organization.
This information is grouped by industry, number of employees, sales volume and/or operating budget.
This makes it easier to determine if the companies pay practice gives it a competitive advantage.
IPMI-HRM-Krishnan Rajendran, 2010
Pay-Level StrategiesPay-Level Strategies There are three market strategies
1. meet-the-market which establishes pay that is in the middle of the pay range for the selected group of organizations.
2. lag-the-market where an organization establishes a pay level that is lower than the average in the comparison group.
3. lead-the-market where the average pay level is higher than the average in the comparison group.
IPMI-HRM-Krishnan Rajendran, 2010
HOW IS COMPENSATION HOW IS COMPENSATION STRUCTURE DETERMINED? STRUCTURE DETERMINED? The pay structure focuses on how
compensation differs for people working in the same organization.
Job-based pay—focuses on evaluating different tasks and duties associated with various jobs in the organization.
Skill-based pay focuses on the difference in skill and ability required to perform the job.
IPMI-HRM-Krishnan Rajendran, 2010
Job-Based PayJob-Based Pay
IPMI-HRM-Krishnan Rajendran, 2010
Skill-based Pay.Skill-based Pay.
IPMI-HRM-Krishnan Rajendran, 2010
Executive Compensation: Ethics Executive Compensation: Ethics and Accountabilityand Accountability Incentive payments are excessive compared
with return to stockholders.Time periods for judging and rewarding
performance are too short.Quarterly earnings growth is emphasized at
the expense of research and development.Emphasis is placed upon equaling or
exceeding executive salary survey averages.
Benefits do not relate closely to individual performance.
The “Sweetness” of Executive Perks
• Company car• Company plane• Executive eating facilities• Financial consulting• Company-paid parking• Personal liability insurance• Estate planning• First-class air travel• Home computers• Chauffeur service• Children’s education
• Spouse travel• Physical exams• Mobile phones• Large insurance policies• Income tax preparation• Country club membership• Luncheon club membership• Personal home repairs• Loans• Legal counseling• Vacation cabins
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