COMPENSATION MANAGEMENT
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.
Compensation administration is the process of
determining and managing the payment of wages,
salaries, and other forms of compensation to
employees. It involves setting and reviewing pay
scales, determining pay grades and job
classifications, and evaluating individual
performance to determine pay raises and
promotions.
Total Compensation Process
Objectives
• Align employee incentives with the goals of
the company:
• Attract and retain top talent
• Motivate and reward high-performing
employees
• Foster a positive work culture
• Stay competitive in the market
• Consider the financial goals of the company
Benefits of Proper Compensation
Compensation policy aims to attract talented employees and motivate
them to put their efforts and commitment to work that increase job
satisfaction work performance
Benefits of Proper Compensation Administration
1 2 3 4 5
Attracts talent Motivates Rewards Reduces Manages
Employees Performance Turnover Compensation
Budget
How is compensation used?
Compensation may be used to:
• Recruit and retain qualified employees.
• Increase or maintain morale/satisfaction.
• Reward and encourage peak performance.
• Achieve internal and external equity.
• Reduce turnover and encourage company
loyalty.
• Modify (through negotiations) practices of
unions.
Components of compensation
Benefits include both financial and non financial
• Wages and Salary: DA is part of it.
• Incentives: depend on productivity, sales, profit etc.
• Allowances: HRA, Conveyance allowance, LTA etc.
• Claims: part of monthly salary but paid by bill put up for ex: mobile, medical etc
• Gratuity : statutory component, Gratuity ACT, 1992
• Fringe Benefits: PF, Medical
• Perquisites: Cabs, paid holidays, stock options
• Non Monetary Benefits
Basic Wage / Salary
• Basic wage provides the foundation of pay packet. It is a
price for services rendered.
• wage rates are determined according to the grades
• wage rates are determined according to the grades: Rs.
8,000-275-13500
• There are two ways in which basic wages can be
determined (though incentives can also be given in these
two ways)
• (i) Time Wage System
• (ii) Piece Wage System
• Dearness Allowance
Dearness allowance also known as cost of living
adjustments
Components of Remuneration
Remuneration
Financial Non Financial
Wages and Incentives Fringe Perquisites Job content
Salary benefits
Individual Company Challenging
Hourly plans CPF car job
wages and Group plans Gratuity Club responsibilities
monthly Medical membership Supervision
rates salary etc. Furnished Growth
house prospects
Stock option Working
schemes conditions
etc. Etc.
Direct Indirect
Components of Employee Compensation
Basic Salary: The basic pay is the basic salary withdrawn by an employee in an
organization. It depends on the company’s policies and the laws of the company. It is
that part of the salary that is taxed.
House Rent Allowance (HRA): Few companies provide their employees with
accommodation or home rent allowances. This is in addition to the paid salary. It is
generally calculated based on the basic salary obtained by an employee.
Dearness Allowance (DA): This component of employee compensation helps the
employees adapt to the changes in standard of living.
Travelling Allowance: Specific organizations provide travel allowances when an
employee needs to travel. It may or may not be included in the basic salary. Its
calculation differs from company to company and requires proof of travel.
Other Special Allowances: Other special allowances are the monetary benefit given to
the employee above the basic salary to meet specific requirements. The employers offer
these additional benefits for the meeting expenditures, etc.
Variable Pay: Variable pay is that portion of the salary determined based on employee
performance. variable pay is given in incentives, bonuses, or commissions. It is given
out for the additional contribution beyond an employee’s workload.
Stock Options: It is a part of employee compensation where companies employees
and executives of the company are granted equity. These shares are issued by the
company and cannot be sold.
Components of Employee Benefits
• Employee benefits can be monetary, non-monetary, or both. Employee benefits help
in attracting and retaining the right talent in a company.
• Paid Time Off: It is an essential component of employee benefits where employees
can still receive a salary when they take leave or vacation. Also, according to the
employee’s position, they can receive a privilege leave.
• Medical Insurance: It is another part of employee benefits and compensation and
includes health insurance, family health insurance, hospital cover, etc. A few
companies also cover the death of an employee and provide financial assistance to
the family members of the deceased employee.
• Fringe Benefits: It is a non-monetary benefit and covers educational assistance,
childcare, flexible healthcare expenditures, etc. It may include benefits such as a
company car, gym membership, etc. Fringe benefits may also provide entertainment
allowances, discounted travel tickets, family vacation packages, etc.
• Loyalty and Retirement Benefits: A retirement plan as part of the employee
benefits package is an essential factor in employee loyalty. By offering retirement
benefits, an organization maximizes their success rate; it can become easy to get top
talents on the door and retain them in the company.
Dummy
Theories of Remuneration
Feedback to employee
Employee set Performance is Employee consider
expectations and rewarded equity of reward and
goals performance
Employee sets new goals and expectations
based on experience
Theories of Remuneration
Reinforcement Theory
Behavior rewarded Positive Experience Behavior is repeated
Theories of Remuneration
Equity Theory
• Adam’s equity theory emphasizes to have equity in pay
structure of employee
• If employee feel that their efforts are well rewarded they
will put more efforts and will be satisfied with their job
• In case of inequity feeling they will be de moralized and
dissatisfied resulting into low productivity
Individual Motivation
equity
Internal Perception of Commitment
equity fairness
External
Performance
equity
Theories of Remuneration
Agency Theory
• In the organizations employer and employees are two main
stakeholders
• Employer act as principals and employees assume the role of
agent
• The remuneration of employee is agency cost
• Principal tries to agency cost and agent expect to have more
agency cost
• The principal (Employer) should try to choose remunerating
schemes that align its own interest with expectation of agents
(employees)
• Behavior oriented (merit based pay)
• Outcome oriented (profit sharing, commission)
Consequences of Pay Dissatisfaction
performance
Desire for
more pay strikes
absenteeism
grievances
turnover
Search for
new job
Psychological
withdrawal
Job
Pay Lower dissatisfaction
dissatisfaction attractiveness Poor health
of job
absenteeism
Visits to the
doctors
Concepts of Wages
1 Minimum Wage
2 Fair Wage
3 Living Wage
4 Team based Pay
5 Remunerating Professionals
6 Contract Employees
7 Expatriates and Executives
Factors Influencing Remuneration
Internal Factors External Factors
Organization Strategy Economy
Employee Society
Job Evaluation Labour Market
Performance Appraisal Cost of Living
Labor Unions
Legislation
Factors Influencing Remuneration
Business Market Remuneration Blend of
Strategy Position Strategy Remuneration
Invest to grow Merging or Encourage High cash and
grow rapidly innovation and incentives for
entrepreneurship performance.
Modest benefits
Manage earning Normal growth Reward Average
Protect Markets to maturity management skills incentives with
average cash on
unit and
individual
performance.
Standard benefits
Harvest earnings Maturity or Focus on cost Below average
invest decline control cash with few
somewhere else incentives that
too tied with cost
control efforts.
Standard benefits
Remuneration Model
Job description
Job evaluation
Job hierarchy
Pay survey Pay levels
Pricing Jobs Pay grades
Challenges of Remuneration
Skill based pay Monetary and non Salary Reviews
monetary rewards
Employee Remuneration Pay Secrecy
participation
Below market or Comparable worth Elitisms or
above market pay Egalitarianism
Skill Based and Job Based Pay
Factors Skill based Job based
Pay structure Based on ability to Based on job
perform performance
Employer’s focus Employee carriers Job carries wages.
wages, Employee Employee linked to
linked to skills job
Employee focus Skill acquisition for Job promotion for
more pay better pay
Procedures required Skills assessment, Job content
Value skills assessment, Value
jobs
Advantages Flexibility, Reduced Pay based on value
workforce of job and work
performed
Disadvantages Cost controls Inflexibility
Job evaluation for front desk receptionist
Skill (50%)
Education Level
Degree of Technical Skills
Responsibility (30%)
-Scope of Control
-Impact of Job
Effort (20%)
-Degree of Problem Solving
-Task Complexity
Analytics in Compensation Management
The following are some of the metrics that can be useful in
performing analytics in compensation:
1. Average salary position wise: This can be obtained by diving
the sum of salaries provided to all the employees in a particular
job position with total number of employees in that position. Once
the average salary is obtained for each job position, the average
salary can be compared with other job positions within the same
group.
2. Salary benchmarking: It establishes parity between the salary
slabs of one’s organization to the benchmarked organization. In
every 5 years, a benchmarking study should be done. This ensures
a sense of external equity.
3. Within-time settlement: The settlement of payment related to
provident fund, gratuity, and other retirement benefit on time
improves the word of mouth publicity of the organization and also
enhances loyalty toward the employer. Calculating the number of
payments within time gives a clear indication of service efficiency of
the HR team. We can calculate the within-time settlement by the
formula
4. Customer satisfaction index: If the compensation and benefit team does a good
job, it will be reflected in the customer satisfaction index. Thus, measuring the
satisfaction index of the separating employee is very important.
5. Variance in allocation: Compensation analytics should also be applied in the
management of funds. The variances or deviation in the actual versus budgeted figure
should also be monitored. Mathematically, it is expressed as
Analytics in Expatriate Management
A few metrics must be captured to manage the expatriates effectively. These
are as follows:
1. Head count of expatriates: In an organization, it is important to note the
head count of expatriates so that investment related to expatriate
management can be decided effectively. It is expressed as
2. ROI of expatriates: It is the return on sending an expatriate to the work
assignment in foreign lands in comparison to recruiting a foreign national.
3. Happiness index of the expatriates: If the employees are not happy, they
will not be productive. Thus, measuring the happiness index of the expatriates
is essential.
4. Repatriation rate of employees before tenure: The repatriation rate of
employees measures the returning rate to the parent country from the foreign
assignment. It could be because of several reasons such as family not able to adjust
in the foreign land, home sickness, or other adjustment issues. It is calculated by
the following formula:
5. First-year attrition rate of repatriates: When an expatriate successfully
completes the project in the foreign land or the project time gets over, he or she
has to repatriate to the parent country. Now on successful completion of the
project or tenure, the repatriating employee has some expectations from the
parent employers, such as (1) promotion, (2) hike in the salary, or (3) other
recognition. However, most of the organizations do not have a successful
repatriation policy, and as a result, a high percentage of repatriates leave their
parent company in a quick span of time. This attrition is a huge loss for the
organization because (1) the repatriate takes away the knowledge with him or her
and (2) finding a replacement for a seasoned expatriate is a costly affair. Thus,
measuring the attrition rate of repatriates will give a clear picture about the
retention policy of repatriates, and the management can thereafter take some
data-driven decisions.
Summary
•Benefits of Proper Compensation
•Consequences of Inadequate
Compensation
•Concepts of Wages
•Components of Remuneration
•Theories of Remuneration
•Factors Influencing Remuneration
•Remuneration Model
•Challenges of Remuneration
CONCLUSION
HR tools and techniques such as correlation, t-test, ANOVA, and
regression have been suggested to identify linkages between
different HR and business variables.
Data visualization tools such as bar charts and dashboards have
also been embraced.
The major HR functions in which application of HR analytics have
been discussed include
(1)recruitment and selection,
(2)training and development,
(3)performance appraisal,
(4)talent management
(5)employee engagement,
(6)compensation management, and
(7) expatriate management.
