COMPENSATION MANAGEMENT-PAY MODEL

Efficiency
Effective remuneration systems contribute to efficiency in the form of improved performance,
How would you define pay model? What purposes do the objectives of pay model serve? better quality, satisfied customers, or lower costs.
The Pay Model of Compensation and benefits helps managers to structurally design and
understand the compensation system for their employees. The Pay Model of Compensation was Fairness
developed by G.T. Milkovich and J.M. Nemwan in 2002. They define compensation as forms of Fairness refers to designing and introducing a reward system that rewards performance
financial gain and tangible services and benefits that employees receive as part of their and meets the needs of the employees. Fairness is the foundation for healthy work relationships,
employment. which means it’s important that employees are treated fairly and get a salary that matches the
The compensation model that an organization uses should match the company objectives. This work they do.
can help determine which plan is the most beneficial in the long term. This means that elements Conformity
from different compensation models are sometimes combined. The remuneration plan also has Compensation models have to conform to the requirements of various central and national salary
to be on par with that of the competition or be better. And it’s important to comply with laws and legislation and regulations. Conforming to regulations is an integral part of any organization that
regulations. wants to act in accordance with the law. When laws change, the compensation system has to
be changed as well.

The three basic building blocks of pay model. Compensation System Policies
According to the Pay Model of Compensation, the compensation system has to relate to internal
The model consists of three main components/ building blocks consistency, competitive performance, and the contribution of employees. These are the four
pillars on which the policy of a compensation structure is based.
1. Objective of the remuneration model,
2. The policy that is the foundation for the structure, and 1. Alignment
3. The techniques that link the policy to the objectives. Internal alignment refers to aligning the salaries for similar types of jobs, as well as the rewarding
of different kinds of work. Positions are assessed on their relative contribution to the organization’s
objectives. If the compensation structure is seen as fair by the employees, it will help motivate
employees to improve themselves and accept training.

2. External Competitiveness
Competitiveness is about the remuneration plan being competitive enough compared to what
competitors are offering. The plan has to offer sufficient benefits for the potential employee to get
them interested and keep them. The salaries can’t be too high either, as that would negatively
impact competitiveness of the products and services.

3. Contributions
Employee contribution is about how important the performance of the employees is regarding
the remuneration model. Strong employee contribution means that incentives and rewards are
based on what the employees add.

4. Management
KINDLY CREATE A NEW The final component of the four policy methods of the Pay Model Compensation is administration;
DIAGRAM/TABLE
managing the compensation structure. Efficiency is the goal here as well. The system has to work
well enough to achieve the objectives, and it also needs to be adaptable to react to new
requirements. New requirements can be the result of new regulations or new salary objectives for
the organization.
Pay Model of Compensation Objectives
Compensation systems, according to the Pay Model of Compensation, are developed to
Pay Model of Compensation techniques
achieve organizational objectives. As shown in the image, these include efficiency, honesty, and
observance of the rules.
The third component of the Pay Model of Compensation are the techniques. These techniques
connect policy to objectives. • Size of incentive is known beforehand generally
In order to comply with internal alignment, as the model shows, the techniques are skills and work • Relies on an objective measure of performance, whereas merit increases typically relies
analysis. In order to meet the competition policy, surveys can be held and market definitions can on subjective rating of one’s performance.
be created. The employee contribution is assessed based on performance guidelines. When
• Merit -> influence performance, incentive -> influence behavior
managing these remuneration plans, communication and change are important factors.
• The distinction is a matter of timing (b/t merit vs incentives)

Components of total compensation • Incentives can be tied to the individual, team, business unit or combo
How does the pay model help organize one’s thinking about compensation?ELABORATE • Because incentives are a one – time payment, they do not a permanent effect on labor
Provide examples. costs. When performance declines pay automatically declines too.

Long term Investment

• Incentives may be ST or LT
• LT usually in form of stock

• Idea behind stock ownership is that employees w a financial stake in the organization
will focus on LT financial objectives.
•
Benefits - Insurance and Pension
• Some insurance programs are required by law
• Different countries have different mandatory benefits
• Help protect employees from the financial risk of daily life
• Often companies can provide these more cheaply than employees can obtain for
themselves.
• Cost of providing benefits is rising -> regarded as important form of compensation.
•
Benefits - Work / Life Programs
Include: time away from work, access to services to meet specific needs, flexible work
arrangements.
Cash Compensation – Base Pay
Wages or Salary - cash compensation an employee receives for the work performed. Benefits - Allowances
• Base pay tends to reflect the valve of work or skills and generally ignores differences • Allowances: often grow out of whatever is in short supply
attributed to individual employees • Total Earnings Opportunities: Present Value of a Stream of Earnings
• Distinction usually made between wage and salary. • Compensation decision have temporal effect
• A present value perspective shifts the choice from company today’s initial offers to
Cash Compensation - Merit Increases and Cost of Living Adjustment
consideration of future bonuses, merit ↑and promise some employers their relatively low
• Merit Increases: given as increments to the base pay in recognition of past work behavior. starting offers will be overcome by larger few pay increases – Few candidates apply ->
• Assessment of past behavior is made with or without formal performance evaluation. some analysis.

Cost of living adjustments Other Benefits

• Gives the same percentage increase to everyone regardless of performance level to
Other benefits are:
maintain pay levels relative to increase in the cost of living.
• Less prevalent than in the past.  Dental insurance
 Health insurance
Cash Compensation - Incentives  Personal insurance
• Incentives or Variable Pay - the pay increases directly to performance  Medical insurance
• Do not increase base pay and so much be re earned each period  Leave days
 Pension schemes basis for judging performance to conclude that their pay is fair
 Tax benefits
4. Management of Pay Systems -
• Proper mgmt. of pay systems ensures that the right people get the right pay for achieving
The four policy issues in the pay model the right objectives in the right way.
• More strategic thinking managing pay as part of the business.
Four Policy Choices
Every Employer must address the strategic policy decisions To Condense the Pay Model of Salary
1. Internal alignment A structured approach to structuring compensation systems can be found in Milkovich & Newman's
2. External competitiveness Pay Model Compensation. The policy that serves as the framework for the structure, the methods
3. Employee contribution that connect the policy to the objectives, and the goal of the remuneration model comprise the
4. Management of pay system three parts of the model.

A compensation system needs to be adequately competitive and aim for legal and regulatory
compliance. Compensation comes in a variety of forms. A base pay, commissions, incentives, and
1. Internal Alignment (JUST EXPLAIN – WILL BE DISCUSSED ON NEXT CHAPTER)
other benefits make up the entire compensation package.
• Internal Alignment - refers to pay comparisons between jobs or skill levels inside a single
organization.
• Jobs and people’s skills are compared in terms of their relative contribution to the
organization’s objectives. PAY STRATEGY
• Determining the appropriate cliff in pay for people performing different work is a key
challenge facing Managers
The compensation strategy plays a crucial role in ensuring clarity when making salary and benefits
• Internal alignment policies affect all three compensation objectives
decisions within your organization. With a clear framework for compensation, you will be able to
• Employee’s decision to stay in the organization
help your organization become more competitive when it comes to attracting and retaining talent.
• To become more flexible by investing in additional training
• Seek greater responsibility But it is not enough to just have a compensation strategy — you need one that is aligned with your
• Fairness determined by employees comparisons of their pay to the pay of others in the organizational culture. This is how you can ensure that your employees feel valued, motivated, and
organization satisfied. You need to encourage them to behave and perform in a way that will help the
• Compliance is affected by the basis used to make internal comparisons. organization achieve its goals.

What is a compensation strategy?

2. External Competitiveness (What do you mean by the External Competitiveness
of compensation? Why is it important? -2013)
A compensation strategy describes how your company will compensate its employees and provide
• External Competitiveness - refers to compensation relationships external to the
benefits. This covers your company's standing in the labor market, the amount of overall funds, the
organization
organization's primary bonus policies, basic wage guidelines, and employee perks. Executive
• External competitiveness decisions ( how much & what form ) have a fold effect an management is always the owner of the pay strategy because it has a significant impact on the
objective organization's budget. The plan is shaped and provided feedback by the HR and/or Compensation
1. They ensure that the pay is sufficient to attract and retain employees & Benefits departments.
2. They control labor costs so that the organization remains competitive in the global
economy. The goal of a compensation strategy is to establish the guiding principles that will help you decide
which components of compensation to prioritize and what goes into your overall plan.
3. Employee Contributions
• Refers to the relative emphasis placed on performance Another thing to pay attention to is that the compensation strategy needs to align with the business
1. Degree of emphasis placed on performance is important because affects and HR strategies. This is because you need to have a strong compensation strategy to attract and
employees attitudes and work behaviors retain the talent your organization needs. Additionally, compensation also reflects what top
management expects from employees in terms of behaviors, performance, and results.
2. Employers to pay for performance more emphasis on merit incentives
• Recognition of contribution affects fairness but employees have to understand the
Why does your organization need a compensation strategy? (Elaborate/provide examples)
Why is a compensation strategy important?

Four Steps to Develop a Complete Compensation Strategy (ELABORATE)

1. Organize the job descriptions.

2. Setting Salary Benchmarks – Conducting market compensation survey.
3. Setting pay scales.
4. Considering labor supply & demand.
Three most popular Approaches

There are three main compensation strategies to consider when

setting salary rates: leading, lagging and meeting the market.

Leading
A leading compensation strategy aggressively sets salary rates above the market. By paying
employees more than the market rate, it’s easier to attract qualified talent and retain your best
employees. You also set yourself apart from other organizations and promote the perception that
your company is the employer of choice. In order to go with a leading compensation strategy, you
have to have the financial health to pay employees higher salaries.

Lagging
A lagging compensation strategy is when you set salary rates below the market rate. There are
several reasons to pay employees below the established market rate. Smaller organizations don’t
have the financial resources to devote to salaries. Others have non-monetary characteristics
to recruit talent, like nonprofits and charitable organizations. Opting for a lagging strategy can help
lower costs and you can use the money saved to offer benefits and incentives. Paying salaries
below the market rate will make it difficult to attract good employees and well-trained employees
may leave for higher paying competitors.

Meeting the Market

Meeting the market is a compensation strategy where you pay employees the market rate. In this
strategy, employees are paid fairly and expected to perform well. As the most common
compensation strategy, meeting the market ensures that your pay and costs match the
competition. In strong financial environments, you can share bonuses and short-term incentives with
employees. Though employees are paid well, this strategy may make it hard to keep your best
employees as they are recruited by companies offering more money.