Group Name: INNOVATORSGroup Name: INNOVATORS

Gazi Munia UddinLecturer,

Dept. Of Business AdministrationLeading University

To know what is CompensationTo know what is Compensation To know Compensation typesTo know Compensation types To know theories behind compensationTo know theories behind compensation To relate classroom study with that of real life To relate classroom study with that of real life

situationsituation

Extrinsic rewards that employees receive in Extrinsic rewards that employees receive in

exchange for their work. exchange for their work.

Composed of the base wage or salary and Composed of the base wage or salary and

incentives or bonuses and any benefitsincentives or bonuses and any benefits.

Figure : Types of Compensation

Remuneration provided to employees in exchange for Remuneration provided to employees in exchange for their labor and services. What makes it direct is that it their labor and services. What makes it direct is that it is given to the employee without an intermediary. Two is given to the employee without an intermediary. Two Types Direct of compensation:Types Direct of compensation:

Pay: It consists of wages and salaries received for Pay: It consists of wages and salaries received for performing work. performing work.

Incentives: They are provided for higher performance. Incentives: They are provided for higher performance.

TYPES OF COMPENSATION (CONTD.)

Figure: Direct compensation

Direct compensation

TYPES OF COMPENSATION (CONTD.)

Provided for the employee’s benefit, but are not given directly to the employee. Under indirect compensation there are major two types of compensation

Benefit: The payment addition to pay

Services: They increase employee wellbeing at no cost or

significantly reduced cost to employee

Fig 3. Indirect Compensation

Indirect compensation

Response followed by a reward is more likely Response followed by a reward is more likely to recur in the future.to recur in the future.

The implication for compensation The implication for compensation management is that high employee management is that high employee performance followed by a monetary reward performance followed by a monetary reward will make future high performance more will make future high performance more likely. likely.

The theory emphasizes the importance of a The theory emphasizes the importance of a person actually experiencing the reward.person actually experiencing the reward.

THEORY OF COMPENSATION ( CONTD.)THEORY OF COMPENSATION ( CONTD.)

Like reinforcement theory, expectancy theory Like reinforcement theory, expectancy theory (Vroom, 1964) focuses on the link between (Vroom, 1964) focuses on the link between rewards and behaviors. rewards and behaviors.

People are motivated by intrinsic and extrinsic People are motivated by intrinsic and extrinsic outcomes they desireoutcomes they desire

People will only be motivated if outcome is People will only be motivated if outcome is possible.possible.

People will only be motivated if outcome is People will only be motivated if outcome is contingent.contingent.

THEORY OF COMPENSATION ( CONTD.)THEORY OF COMPENSATION ( CONTD.)

Comparing inputs and outputs of a similar co-workerComparing inputs and outputs of a similar co-worker Employee perceptions of what they contribute to the Employee perceptions of what they contribute to the

Organization, what they get in return, and how their Organization, what they get in return, and how their return-contribution ratio compares to others inside return-contribution ratio compares to others inside and outside the organization,' determine how far they and outside the organization,' determine how far they perceive their employment Relationship to be perceive their employment Relationship to be (Adams, 1963). (Adams, 1963).

Perceived inequity affects employee effortPerceived inequity affects employee effort

EQUITY THEORY

Focuses on the divergent interests and goals of the Focuses on the divergent interests and goals of the organization's stakeholders, and the ways that employee organization's stakeholders, and the ways that employee compensation can be used to align these interests and compensation can be used to align these interests and goals (Eisenhardt, 1989; Fama & Jensen, 1983). goals (Eisenhardt, 1989; Fama & Jensen, 1983).

depends partly on the following factors :depends partly on the following factors : - Risk aversion. - Risk aversion. - Job programmability. - Job programmability. - Measurable job outcomes. - Measurable job outcomes. - Ability to pay. - Ability to pay. - Tradition. - Tradition.

Cash component of the wage structure based on which Cash component of the wage structure based on which other elements of compensation may be structured. other elements of compensation may be structured.

Normally a fixed amount which is subject to changes Normally a fixed amount which is subject to changes based on annual increments. based on annual increments.

Dearness allowance The payment of dearness allowance facilitates employees The payment of dearness allowance facilitates employees

and workers to face the price increase or inflation of prices and workers to face the price increase or inflation of prices of goods and services.of goods and services.

The payment may be a fixed percentage on the basic wage.The payment may be a fixed percentage on the basic wage.

Basic wages/Salaries

Can be fixed percentage on the basic wage paid annually Can be fixed percentage on the basic wage paid annually or in proportion to the profitability. or in proportion to the profitability.

The Government also prescribes a minimum statutory The Government also prescribes a minimum statutory bonus for all employees and workers.bonus for all employees and workers.

There is also a bonus plan which compensates the There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Managers and employees based on the sales revenue or Profit margin achieved. Profit margin achieved.

Commissions May be based on the sales revenue or profits May be based on the sales revenue or profits always a fixed percentage on the target achieved. always a fixed percentage on the target achieved.

MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)

Also called combination or mixed planAlso called combination or mixed plan Apart from the salaries paid, the employees may be Apart from the salaries paid, the employees may be

eligible for a fixed percentage of commission upon eligible for a fixed percentage of commission upon achievement of fixed target of sales or profits or achievement of fixed target of sales or profits or Performance objectivesPerformance objectives

Paid wages for each of the Quantity producedPaid wages for each of the Quantity produced Piece rate wages improves productivityPiece rate wages improves productivity

MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)

Profit sharing payments Paid through payment of cash or through ESOPS. Attracts competitiveness and improved productivity.  

Fringe BenefitsThe provision of fringe benefits does not attract any explanation.

These include. Company cars Paid vacations Membership of social/cultural clubs Entertainment tickets/allowances. Discounted travel tickets. Family vacation packages

MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)

Reimbursements Based on the Expenses incurred and substantiated. In many cases, employers provide advances to the employees

for incurring certain expenses Some examples are: Travel expenses, Entertainment expenses,

Out of pocket expenses.

Sickness benefits/pregnancy Payments during pregnancy of women employees, injury or

illness. supporting financial benefits to the family of the bereaved

employees.

MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)