Compensation – Definition and Pay

Model

Definition

Compensation means that

counterbalances or makeup for

something else.

It is the total amount of the monetary

and non-monetary pay provided to an

employee by an employer in return for

work performed as required.

Compensation is based on• Market research about the worth of similar jobs in the marketplace,

• Employee contributions and accomplishments,

• Availability of employees with like skills in the marketplace,

• Desire of the employer to attract and retain a particular employee for the

value they are perceived to add to the employment relationship, and

• Profitability of the company or the funds available in a non-profit or public

sector setting, and thus, the ability of an employer to pay market-rate

compensation.

• Compensation also includes payments such as bonuses, profit sharing,

overtime pay, recognition rewards and checks, and sales commission.

Compensation can also include non-monetary perks such as a company-paid

car, stock options in certain instances, company-paid housing, and other

non-monetary, but taxable, income items.

Forms of Pay

Total Returns

Total Compensation

Cash Compensation

Base Merit / Cost of living

Short term and long term

incentives

Benefits

Income protection

Work life balance

allowances

Relational Returns

Recognition and status

Employment security

Challenging work

Learning opportunitie

s

Base Wage and Merit Pay/ Cost of Living Adjustment

Base Pay:

• Cash compensation that an employer pays for the work performed.

• It reflects the value of work or skills and generally ignores

differences attributable to individual employees.

• Difference between salary and wages. (as per Fair Labor

Standards Act – no OT for salaried employees)

Merit Pay / Cost-of-living Adjustments:

• Merit increases are given as increments to the base pay

(depending upon experience and performance)

• Cost of living adjustments are same regardless their performance.

Cash Compensation: Incentive• Incentive α Performance.

• Not included with base pay

• Potential size of incentive payment will

generally be known before hand.

• Merit pay (Past performance) Vs Incentive

(future performance)

• Incentive can be tied to individual employee /

group/ total business unit or combination of all.

Long Term Incentive• Focus on employees multi year results.

• In the form of stock ownership or options to buy

stock at advantageous price.

• Thus employees will focus on long term financial

objectives: return on investment, market share.

• Stock option is the largest component in

executive pay package.

• Eg: Google, Intel, Sun Microsoft, Starbucks etc.,

Benefits: Income Protection• Medical Insurance, retirement

programs, life insurance and savings

plan are common benefits.

• They help protect employees from the

financial risks inherent in daily life.

• Eg: ESI

Benefits: Work/Life Balance

• Time away from work – vacations

• Flexible work arrangement

• Responding to changing demographies to

work force (2 income family)

• Health and wellness, security, individual

and family wellbeing, fulfilling work

environment – total well being

Benefits: Allowances

• Housing allowance, transportation

allowance

• Rice allowance (after world war II –

Japanese firms)

• In many European countries – car will

be provided for manager – who decide

the model

Total Earnings opportunities

• Retention strategy – staying 5 years - annual

increment of 4%

• Merit increases and promotions

Relational Returns from work:

• Recognition, status, employment security,

challenging work and opportunities to learn.

• Teaming with great co-workers, receiving new

uniform

Pay Model

EFFICIENCYPerformance

QualityCustomer and Stockholder

Cost

FAIRNESS

COMPLIANCE

OBJECTIVESTECHNIQUESPOLICIES

Work Description Evaluation / INTERNAL Analysis Certification STRUCTURE

Market Surveys Policy PAY Definitions Lines STRUCTURE

Seniority Performance Merit INCENTIVE Based Based Guidelines PROGRAM

Cos t Communication Change EVALUATION

ALIGNMENT

COMPETITIVENESS

CONTRIBUTIONS

MANAGEMENT

Compensation Objectives• Fairness – fair treatment for all employees by recognizing

both employees contribution (eg: higher pay for greater

performance, experience, or training) and employee needs

(fair wage as well as fair procedure).

• Compliance - MNC (should obey laws of all countries)

• Objectives guide the design of the pay system – eg:

customer satisfaction - ?

• Pay system should consider the external competitiveness

and internal alignment

• Policies and Techniques are means to reach objectives

• Compensation should be according to ethics.

Four Policy ChoicesInternal 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 (base,

incentives, stock, benefits etc).

• “Market Driven Pay” – both how much and what form. Have 2

fold effect on objective (to attract and retain and to control

labour cost)

Four Policy ChoicesEmployee Contribution

• Performance based / Seniority based

• Eaton and Motorola – Team based pay and corporate profit

sharing plans

• 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”