What is Compensation What is Compensation Management?Management?

Compensation Management, a basic function of the Human Resource Management, is administering the wage, salary, benefits, and rewards of the employees in the organizations.

Key concepts to discuss:1.Difference between intrinsic and

extrinsic compensation2.Concept of base pay 3.Concept of equity in

compensation4.Job Evaluation5.Pay Structure

Kinds of Organizational Kinds of Organizational CompensationCompensation

Organizational Compensation

Extrinsic or Core Compensation

Intrinsic Compensation

Intrinsic CompensationIntrinsic Compensation

•Intrinsic compensation includes all the activities that have an impact on the intellectual, emotional and physical well being of the employee and is not specifically covered by the extrinsic compensation system.

Enhancing Dignity and Satisfaction Enhancing Dignity and Satisfaction from Work Performedfrom Work Performed

Possibly the least costly and one of the most powerful reward an organization can offer to the employees is to recognize them as useful and valuable contributors.

This kind of recognition leads to employee feelings of self-worth and pride in making a contribution.

Every compensation and non-compensation reward component should carry with it the message, “We need you and appreciate your efforts.”

Safe Working ConditionsSafe Working Conditions

Provision of safe equipment; a work environment that is as risk-free as possible; minimization of noxious fumes; avoidance of extreme heat, cold, and humidity conditions; and elimination of contact with radiation and other disease-related materials are expected by all employees.

Promoting Constructive Social Promoting Constructive Social Relationships with Co-workersRelationships with Co-workers

In this world of extreme specialization, people need and rely on other people more than ever.

A workplace environment where trust, fellowship, loyalty, and love emanate from the top level of management to the lowest levels of the organization promotes the kind of social interaction most people need in order to thrive.

So, one of the inexpensive but most valued rewards offered through working is the opportunity to the employees to interact in a socially constructive manner with other people to enjoy the comradeship of workplace associates.

Designing Jobs that Require Designing Jobs that Require Adequate Attention & EffortAdequate Attention & Effort

As against “Scientific Management”, new approaches to improve the quality-of-work-life are needed.

Employees need to have more voice in how their jobs should be structured and performed.

Restructuring of job tasks and flexibility in job requirements through rotating the work assignments and by giving employees more opportunity to perform their assignments in their own ways, are among the non-compensation rewards that are believed to enhance the output as well.

Allocating Sufficient Resources to Allocating Sufficient Resources to Perform Work AssignmentsPerform Work Assignments

To make work satisfying, employees must not be placed in a no-win situation.

To produce certain kinds and quantities of output, they must be provided with sufficient resources.

Management must be careful about:Does the employee have the time to perform

the assignment? Are the necessary human, technical, or

physical resources available to them? Has the organization assisted the employee to

gain the knowledge and skill necessary to perform the assignment?

Providing the Career GrowthProviding the Career Growth

It is responsibility of the organization to provide the employees clear career paths and enhance their employability.

Extrinsic CompensationExtrinsic Compensation

Total Compensation package

Base Pay

Wage & Salary Add-ons

Services & Benefits

DeferredPaymentOverti

meShift differentialsPremium paymentfor working on holidays& weekends

Burdensome, distasteful,hazardous work(Radiation, fumes, dust, excessive heat/cold,noxious odors)

Pay for work not done

Incentive Payments

AccommodationMedical FacilitiesGroup Insurance

Conveyance

Others

Pension Plans

EOBI pensions

Savings & Thrift Plan

Supplemental Income Plan

Others

Social Security Support

Base PayBase Pay

Base pay is recurring, that is, employee will continue to receive as long as they remain in their jobs.

Companies disburse base pay to employees either in the form of hourly pay for each hour worked or in the form of salaries earned for performing jobs on weekly, monthly or annual basis, regardless of the actual number of hours worked.

Determinants of the Base PayDeterminants of the Base Pay

1.Kinds and level of required knowledge and skillNo one single factor carrier greater significance than the current level of knowledge, skills and abilities (KSAs) required of the job-holder to perform a particular job.

Higher the level of possessed KSAs higher the pay level and the vice versa.

2. Employee seniority and experienceIt is not unusual to find very senior employees being paid double the amount received by a new employee for comparable jobs.

This is because employers frequently find more senior employees to be more dependable and predictable.

3. Supply and demand of particular skill

Even in times of high unemployment, individuals with certain sets of skills or abilities are in demand.

Jobs in high demand are frequently called “exotic” jobs, and those who have the necessary skills can demand and will receive premium wages.

4. Public vs. Private Sector Being with profit orientation, private-

sector businesses offer higher rates of pay than those in the public sector.

Similarly, within the private sector, profit organizations pay far more than nonprofit organizations.

5.5. Capital intensive Vs labor Capital intensive Vs labor intensive businessintensive business Labor-intensive industries require the employment of larger numbers of low-skilled laborers against relatively lower pay rates. Conversely, as businesses become more capital-intensive, using newer and more sophisticated technology and processes, they require fewer but highly skilled employees against heavy emoluments.

6. Size of business Large businesses quite often

provide higher wage rates than smaller businesses.

7. Company StrategyGrowth Strategy

Companies in growth mode adopt differentiation strategies to develop products or services that are unique from those of its competitors.

Such firms would focus on employee performance with emphasis on creativity, innovation, risk taking to win competitive advantage over the rivals.

Compensation practices in such organizations are employed to contribute to such competitive advantage through promoting more productive and highly skilled workforces by providing them with the opportunity for high earnings.

Cost Effective StrategyFirms following cost effective strategy, on

the other hand, focus on gaining competitive advantage by being the lowest cost producer of a good or service within the marketplace.

Since, their focus is more on survival than on external competitiveness and require just maintenance of the current skills that exist in it, they prefer comparatively less qualified but cheap workforce .

8. Profitability of the firm Employees working for highly-

profitable businesses have a greater chance of receiving higher wages than those working for less profitable firms.

Base Pay AdjustmentsBase Pay Adjustments

Job Based Adjustments

Person Based Adjustments

COLAs

Seniority based adjustmentMerit based adjustment

Skill-based Pay

Seniority based adjustmentSeniority based adjustmentThis system of pay rewards employees with

periodic additions to base pay according to employees’ lengths of service.

Under this system, employees receive automatic pay raise based on number of years they have been with the organizations, which is a permanent addition to their current pay levels.

Today all government and public sector organizations and most of the unionized private sector companies base salary on seniority or length of employee service.

Pay plans under this system assume that employees become more valuable to companies with time, and that valued employees will leave if they do not have a clear idea that their wages will progress over time.

Furthermore, over time, employees presumably refine existing skills and acquire new ones that enable them to work more productively. Thus, seniority pay rewards employees for acquiring and refining their skills as indexed by length of employment.

Advantages Of Seniority PayAdvantages Of Seniority Pay

1. Seniority stands in contrast to subjective standards based on supervisory judgment. The inherent objectivity of seniority pay systems should lead to greater cooperation among coworkers.

2. Employees are likely to perceive they are treated fairly because they earn pay increases according to seniority, which is an objective standard.

3. Hence, employers are less likely to offend the employees on pretext of favoritism to others, contributing towards healthy environment.

4. Seniority pay facilitates the administration of pay programs. Pay increase amounts are set in advance, and employers award raises according to a pay schedule, much like the Federal Government’s General Schedule.

Disadvantages of the Seniority Disadvantages of the Seniority paypay

Seniority pay constitutes system-wide reward and employees can count on receiving the same pay raises for average as well as an exemplary performance.

It does not offer any motivational force for the low producers to perform better nor it floats any encouraging message for the high-fliers and rate busters.

Rather, conversely, it could be a source of displeasure for the latter owing to the element of perceived inequity. This fact represents the greatest disadvantage of seniority pay systems.

Merit based AdjustmentMerit based Adjustment

Merit pay programs assume that employees’ compensation over time should be determined, at least in part, by differences in job performance.

The pay raise based on performance rewards excellent effort or results, motivates future performance, and helps employers retain valued employees.

Merit pay programs occur most often in the private “for-profit” sector of the economy rather than in the public sector organizations such as local and state governments.

Skill based adjustmentSkill based adjustment

Concept of Equity in CompensationConcept of Equity in Compensation

The concept of equity refers to a comparison of a ratio of outcomes to inputs of a person on the job with the ratio of outcomes to inputs of a comparison person or generally called referent other.

The comparison person may be another person on the same job engaged in direct exchange to the individual, a member of the same occupation, or even some composite of several comparison persons.

Two important aspects relating to equity should be recognized.

1.The conditions necessary to produce equity or inequity are based on the individual’s perception of inputs and outputs vis-à-vis those of referent others. The objective characteristics of the situation are of less importance than the individual’s perception.

2.Inequity is a relative phenomenon. Same amount received can be a source of satisfaction in one situation and a source of dissatisfaction in the other.

Magnitude of equity in compensationMagnitude of equity in compensation

No factor has a greater effect on emotional reactions of employees than perception of fairness and equity. The experience of inequity is very distressing and people will try several strategies for bringing the ratios back into alignment.

◦ Adjusting ones inputs (putting in lesser efforts).◦ Adjusting one’s outputs (resorting to unfair

means of output).◦ Changing the comparison person◦ Leaving the situation

Types of EquityTypes of Equity

Inter-person EquityIntra-person Equity

Inter-person EquityInter-person Equity

Inter-person equity is said to exist whenever the ratio of person’s outcomes to inputs is equal to the ratio of outcomes to inputs of referent others.

O s O o----- = -----I s I o

Inter-person inequity exists whenever two ratios are unequal

O s O o----- < ----- Inequity, under

rewardI s I o

Or

O s O o----- > ----- Inequity, over

reward I s I o

Inter-person equity ModelInter-person equity ModelEducationTrainingSkillsExperienceAgePresent performance

Level ofdifficultyTime spanAmount of responsibility

Perceived payof referent others

Actual pay received

Perceived jobcharacteristics

Perceived personal job inputs

Perceived input ofreferent others

Perceived amount that should be received

(a)

Perceived pay received relative to others

b

a=b satisfactiona>b dissatisfaction a<b guilt, discomfort, more effort

Different dimensions of Inter-Different dimensions of Inter-person Equityperson Equity

Inter-person equity has two dimensions:◦External Equity – how fairly one is

being treated vis-à-vis the market rates. External equity can be realised through market surveys.

◦Internal Equity – how fairly one is being paid vis-à-vis different internal parallel jobs. Internal equity can be realised through job evaluation.

Intra-person EquityIntra-person EquityIntra-person equity warrants a balance among different factors and aspects relating to the job that determine the level of the job assignment.

The debate is based on the following propositions.

◦ Every worker is endowed with a specific level of capacity for work (C). This capacity varies across people.

◦ Each job to be performed demands a specific level of capacity (W).

◦ Every job has a rate of pay that is fair to be paid for that job. It corresponds to each job’s demand to get performed (P).

So equity will prevail if the demands of the job, capacity of the individual to perform that job and pay level are in harmony.

C --------------- W -------------- P

Reasons of intra-person inequityReasons of intra-person inequity Conversely, as shown in the following

diagram, a variety of ways that inequity can develop.

C

W

P

P

W

C

1.

2.

3.

C

W P

4.

C

W

P

5. W C

P

6. W C

P

Implications of the concept of Intra-person Implications of the concept of Intra-person Equity for Recruitment and SelectionEquity for Recruitment and Selection

People can be assigned to jobs that do not correspond to their capacities.

Wages can be set that do not correspond to the level of work the job demands.

Wages can be set that correspond to the level of work demanded by a job but not to the individual’s capacity for work.

Discussion QuestionsDiscussion Questions1. Define the term Intrinsic Compensation.

Why it is as much important as core compensation? Discuss various job and environment related factors that constitute the package of intrinsic compensation.

2. Describe the concept of equity in Compensation with all its aspects. Why this concept is crucial for the Compensation Managers?

3. Define inter-person equity. With the help of a model explain how an individual reaches a perceptual conclusion regarding inter-person equity?

Define and explain the concept of job related intra-person equity. What recruitment and placement related conclusions the discussion on intra-person equity leads to?

5. Define base pay. What are main determinants of base pay?

6. Define seniority based adjustment in base pay. What are merits and demerits of such adjustment?