1 BY FALAK TANZEEM (ASST.

PROFESSOR)

UNIT 4

COMPENSATION MANAGEMENT AND EMPLOYEE RETENTION

Compensation Management

In simple terms, compensation is everything that a company offers its employees in

return for their talent and time. When organized the right way, compensation
dollars can be strategically leveraged to reduce turnover, boost employee
engagement and attract top talent. The purpose of compensation management is to
make the most of company dollars in a way that rewards employees for their work.

Compensation management is the act of distributing some type of monetary value

to an employee for their work by means of the company’s policy or procedures. In
basic terms, it is paying an employee based upon the decided pay and benefit
package for the position. The goal of compensation management is to find quality
people who perform quality work and then compensate them in order to retain
them and reduce turnover rates. Some different types of compensation include
salary, overtime pay, commission, bonuses, and benefits packages that might
include health and dental insurance, vacation time, and retirement savings.

Importance of Compensation Management

1. Compensation management makes a company vigilant. It drives managers to be on

the lookout for star performers who must be given rewards for their efforts, which
ultimately decreases the risk of losing a valuable employee.
2. It is positive reinforcement. Yes, money doesn’t make the world go round and if
line managers are not friendly, helpful and supportive retention is difficult. But
cash prizes and consistent monetary perks in conjunction with a great work
environment allow companies to grow by leaps and bounds through motivated,
hard working employees.
3. Compensation management enhances the company’s reputation. When workers are
satisfied with their monetary and intangible rewards, they attract better prospects
for vacant positions, bringing new, fresh talent to the organization.
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The basic components of employee compensation

Employee compensation and benefits are divided into four basic categories:

1. Guaranteed pay: A fixed monetary (cash) reward paid by an employer to an

employee. The most common form of guaranteed pay is base salary. Guaranteed
pay also includes cash allowances (housing allowance, transport allowance, etc.),
differentials (shift differentials, holiday differentials) and premiums (overtime,
night shift, etc.)
2. Variable pay: A non-fixed monetary (cash) reward paid by an employer to an
employee that is contingent on discretion, performance, or results achieved. The
most common forms of variable pay are bonuses and incentives.
3. Benefits: Programs an employer uses to supplement employees’ compensation,
such as paid time off, medical insurance, company car, and more.
4. Equity: Based compensation – stock or pseudo stock programs an employer uses
to provide actual or perceived ownership in the company which ties an employee’s
compensation to the long-term success of the company. The most common
examples are stock options.

Components Executive Compensation

4 Main Components of Executive’s Compensation

1. A basic salary

A basic salary this is regarded as a “fixed” element of pay and it does not normally
vary in relation to company performance. Since salary establishes the executive’s
basic standard of living, it is necessary for both high and low-performing firms to
pay at the going market rates.
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2. Short-term incentives

Short-term incentives are generally awarded annually. Award opportunities reflect

hierarchical position relationship in most cases with higher opportunities relative to
salary for higher-level positions and vice versa.

3. Long-term incentives

Long-term incentives generally refer to grants or awards where the payment is

based on performance for a period beyond one year.

The chief grant types fall into three broad categories-stock-price appreciation
grants, restricted stock or cash grants and performance-based grants.

4. Benefits/Perquisites

The last component of an executive’s total compensation package consists of a

wide variety of benefits and perquisites. It is difficult to quantify benefits due to
lack of reliability of data. These benefits include company cars, club membership,
spouse travel, housing accommodation etc.’

Factors affecting Employee Compensation

The Compensation is the monetary and non-monetary rewards given to the

employees in return for their work done for the organization. Basically, the
compensation is in the form of salaries and wages. There are several internal and
external factors affecting employee compensation, which are discussed in detail
below.
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1. Internal factors

The internal factors exist within the organization and influence the pay structure of
the company. These are as follows:

(i) Ability to Pay- The prosperous or big companies can pay higher compensation
as compared to the competing firms whereas the smaller companies can afford to
maintain their pay scale up to the level of competing firm or sometimes even
below the industry standards.

(ii) Business Strategy- The organization’s strategy also influences the employee
compensation. In case the company wants the skilled workers, so as to outshine the
competitor, will offer more pay as compared to the others. Whereas, if the
company wants to go smooth and is managing with the available workers, will give
relatively less pay or equivalent to what others are paying.

(iii) Job Evaluation and Performance Appraisal- The job evaluation helps to
have a satisfactory differential pays for the different jobs. The performance
Appraisal helps an employee to earn extra on the basis of his performance.
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(iv) Employee- The employee or a worker himself influences the compensation in

one of the following ways.

 Performance- The better performance fetches more pay to the employee, and thus
with the increased compensation, they get motivated and perform their job more
efficiently.
 Experience- As the employee devotes his years in the organization, expects to get
an increased pay for his experience.
 Potential- The potential is worthless if it gets unnoticed. Therefore, companies do
pay extra to the employees having better potential as compared to others.

2. External Factors

The factor that exists out of the organization but do affect the employee
compensation in one or the other way. These factors are as follows:

(i) Labor Market- The demand for and supply of labor also influences the
employee compensation. The low wage is given, in case, the demand is less than
the supply of labor. On the other hand, high pay is fixed, in case, the demand is
more than the supply of labor.

(ii) Going Rate- The compensation is decided on the basis of the rate that is
prevailing in the industry, i.e. the amount the other firms are paying for the same
kind of work.

(iii) Productivity- The compensation increases with the increase in the production.
Thus, to earn more, the workers need to work on their efficiencies, that can be
improved by way of factors which are beyond their control. The introduction of
new technology, new methods, better management techniques are some of the
factors that may result in the better employee performance, thereby resulting in the
enhanced productivity.

(iv) Cost of Living- The cost of living index also influences the employee
compensation, in a way, that with the increase or fall in the general price level and
the consumer price index, the wage or salary is to be varied accordingly.

(v) Labor Unions- The powerful labor unions influence the compensation plan of
the company. The labor unions are generally formed in the case, where the demand
is more, and the labor supply is less or is involved in the dangerous work and,
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therefore, demands more money for endangering their lives. The non-unionized
companies or factories enjoy more freedom with respect to the fixation of the
compensation plan.

(vi) Labor laws- There are several laws passed by the Government to safeguard
the workers from the exploitation of employers. The payment of wages Act 1936,
The Minimum wages act 1948, The payment of Bonus Act 1965, Equal
Remuneration Act 1976, Payment of Gratuity Act 1972 are some of the acts passed
in the welfare of the labor, and all the employers must abide by these.

Thus, there are several internal and external factors that decide the amount of
compensation to be given to the workers for the amount of work done by them.

EMPLOYEE INCENTIVE SCHEMES

Employee incentive schemes are a great way to motivate and reward staff for their
hard work, whilst also boosting productivity and raising morale.

Employee incentives can be defined as a system by which the employees get

rewarded for their success and hard work in the workplace. The incentives include
various prizes and the recognition among others.

Incentive schemes for employees can vary from business to business and can
include both monetary and non-monetary rewards. They are usually implemented
within a specific time frame and encourage staff to work towards specific targets.

The following are various employee incentives

1. Compensation incentives

The compensation incentives may include bonuses, signing bonus, sharing profit
and many other stock options. The compensation incentive as the name itself says
is about compensating in terms of anything like extra money, rise in the salary and
also sharing the profits of company in the proportion decided by the company in its
plan or the schedule.
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2. Recognition incentives

When the employees are recognized in front of whole staff, it is basically the
recognition incentive. It includes the actions like thanking, presenting or praising
employees by an achievement certificate. Not just this, the company’s manager
may even announce the accomplishment of an employee in one of the important
meetings.

3. The reward incentives

The reward incentives would specifically include the awards to be given to the
employees. The awards could be in any form like gifts, special certificates, and
monetary rewards and so on. Not just this but some companies make use of the
employee referral awards which are used to refer the jobs to some employees. The
reward incentives encourage the employees and also keep them away from the
boredom.

4. Appreciation incentives

When the employees get appreciated for delivering good results or for achieving
the goal, it is referred to as appreciation incentives. But now days the definition of
appreciation incentives has changed to larger extent and it means joining the
company parties, the birthday, anniversary celebrations, paid group lunches,
sporting events, ice cream socials and so on.

5. Offering employee’s equity

Although this is entirely a new concept but many CEO’s have found a way out on
how to spin the wheel while proving these incentives to the employees.

Set up an Employee Incentive Scheme

Setting up your own employee reward scheme will allow you to be as creative as
possible with your employee benefits, as well as specifically tailoring them to the
needs of your business. In order to create a successful incentive scheme for
employees, there are a few things you need to consider:
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(I) Set objectives

First, decide what it is that you want to gain from the scheme. Whether you want to
improve staff skills, increase your margins or lower your employee turnover, be
sure to know what it is you want to gain from the incentive scheme. By knowing
this at the beginning, you will be in a better position to measure its success.

(ii) Set targets

You need to set targets that will be specific to each team and/or individual. It’s
important that everyone feels involved but make sure that you create different
schemes tailored to different people or teams. This will ensure no one is left feeling
alienated, and that everyone can get the most out of their scheme. A poorly tailored
employee reward scheme could lead to employees feeling cheated and dissatisfied,
thus not solving the issue.

When you set targets, be sure to communicate them clearly to all employees so
they know what they can get from the scheme. Also be aware of the difference
between ambitious and achievable targets.

(iii) Set a time frame

Creating a clear time frame not only keeps everyone in the loop but also allows
individuals to assess the amount of work that needs to be done. This also means
that you can resist the urge to micromanage employees and split long-term goals
into shorter ones. By providing short-term goals in this manner, you will be able to
better manage the progress towards your long-term goals, without your employees
losing focus.

(iv) Define rewards

When it comes to showing your appreciation, be creative with your rewards.

Monetary rewards are an easy incentive, but it’s still important to ask your
employees what they would want. Perhaps give them a few options and let them
choose which incentive they would prefer. By selecting an incentive they actually
want, they’ll be much more motivated to work towards their targets.
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Non-monetary rewards are sometimes a better option as they can promote a better
work ethic. Examples include;

 Giving praise
 Increasing the number of paid holiday days
 Giving more autonomy in their current role

(v) Measure success

In order to know how well your reward scheme is working, you need to measure
its success. You need to make sure that your method of measuring is specifically
tailored to your business and your schemes in order to accurately establish whether
or not it was worth it.

RECENT TRENDS IN COMPENSATIONS

MANAGEMENT

FLEXIBILITY

Today’s technology is enabling more and more professionals to change their

mindsets about giving up full-time employment for contract-based opportunities
that offer greater control over their time, growth, education, and job security. This
trend is largely being driven by those with bulkier resumes and longer tenures
especially in STEM (science, technology, engineering and mathematics) industries.
The job market is filling up with new and exciting endeavours, but there are a
limited number of qualified professionals to fill the need.

Managing contractors – who may only be around for 6-12 months – requires a
creative and systematic approach to crafting fair pay and benefits arrangements
that can attract, motivate, and protect them. Note that a majority of these
employees will be in life stages where time for family and personal growth will
take priority. But, the returns to reap can be vast and game-changing for your
organization.

Engaging contingent workers can reduce overhead costs, especially for tax and
infrastructure expenses. Their valuable experiences and insights can introduce
much-needed diversity, dynamism, and agility to your business, and provide cost-
effective learning and innovation initiatives.
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TECHNOLOGY

The concept of having greater flexibility in the workplace has been brewing for a
long time, but the administrative demands for implementing custom arrangements
was a minefield. Nowadays, however, with the world changing at a breakneck
speed, organizations have to be ever more robust.

A mere ten years ago, digital spreadsheets and automated charts were all it took to
enable pay strategies. Now there are powerful compensation software products to
help perform this task. These can not only implement flexible arrangements but
more importantly, integrate seamlessly between systems and process, thus enabling
linkages between job levelling, market benchmarking, and compensation analytics.
This gives compensation professionals increased opportunities to strategize further
and determine timely solutions that could give more bang for buck, not to mention
save countless hours of manual administration.

PERSONALIZATION

Many of the hybrid jobs that now exist weren’t even offered five to ten years ago.
These roles will continue to evolve as we speed through the 21st century, which
will call for an overhaul of the traditional compensation mindset.

Professionals have previously been content to take their salary and expect an
across-the-board approach to pay increases and rewards. But as flexibility in the
workplace becomes the norm, employees will also want their compensation and
benefits packages to become more personalized.

Organizations will see analytics strongly recommending actions to maximize on

human capital by adopting skills-based performance evaluation; customizing pay
and benefits to address the employee’s life stage and personal needs; and creating
alternative paths of career growth.

HEALTH AND WELLNESS

While rapid technological advancements of this era have helped to streamline

systems and processes, they have also made the global marketplace even more
competitive and demanding. According to our 2016 Staying@Work Survey, over
50% of employees say their jobs are a primary source of stress, especially in
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companies where there is less regard or prioritization of personal safety, health,

and wellbeing. Numerous studies have linked workplace stress with various
medical conditions, including cardiovascular disease, obesity, diabetes,
hypertension, certain types of cancer, and mental health issues.

However, many employers still view health and wellness as an individual

responsibility, preferring to stick with mostly hands-off approaches like providing
medical insurance, sick leaves, and occasional off-site activities.

PAY AND TRANSPARENCY

Base salary continues to be the number one driver of attraction and retention for
employees in Asia Pacific. It is as crucial as ever to not only get your
compensation right,but to ensure you are communicating openly and honestly to
your workforce about pay. People now know that performance evaluation is a two-
way street.

Employee Relation

The term ’employee relations’ refers to a company’s efforts to manage

relationships between employers and employees. An organization with a good
employee relations program provides fair and consistent treatment to all employees
so they will be committed to their jobs and loyal to the company. Such programs
also aim to prevent and resolve problems arising from situations at work

Employee relations has become one of the most delicate and complex problems of
modern industrial society. Industrial progress is impossible without labour
management cooperation and industrial harmony. Therefore, it is in the interest of
all to create and maintain good relations between employers and employees.

Employer-employee relations mean the relationships between employers and

employees in industrial organizations. According to Dale Yoder, the term
employer-employee relations refers to the whole field of relationship among
people, human relationship that exist because of the necessary collaboration of
men and women in the employment process of modern industry.
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Nature of Employee Relation

1. Employer-employee relations are the outcome of the employment

relationship in industry. These relations cannot exist without the two
parties—employer and employees.” It is the industry which provides the
setting for employer-employee relations.

2. Employer-employee relations include both individual relations as well as

collective relations. Individual relations imply relations between employer
and employees. Collective relations mean, relations between employers’
associations and trade unions as well as the role of the State in regulating
these relations.

3. The concept of employer-employee relations is complex and multi-

dimensional. The concept is not limited to relations between trade unions
and employer but also extends to the general web of relationships between
employers, employees and the Government. It covers regulated as well as
unregulated, institutionalized as well as individual relations. These multi-
pronged relationships may be in organized or unorganized sector.

4. Employer-employee relations is a dynamic and developing concept. It

undergoes change with changing structure and environment of industry. It is
not a static concept. It flourishes or stagnates or decays along with the
economic and social institutions that exist in a society. The institutional
forces give content and shape to employer-employee relations in a country.

5. Strictly speaking a distinction can be made between human resource

management and employer-employee relations. Human resource
management deals mainly with executive policies and activities regarding
the human resource aspects to the enterprise while employer-employee
relations are mainly concerned with employer-employee relationship.
Human resource management refers to that part of employment relations
which is concerned with employees as individuals, collective or group
relationship of employees and employers constitute the subject matter of
employer-employee relations.

6. Employer-employee relations do not function in a vacuum. These are rather

the composite result of the attitudes and approaches of employers and
employees towards each other. Employer-employee relations are an integral
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part of social relations. According to Dr. Singh (Climate for Industrial

Relations, 1968) the employer-employee relations system in a country is
conditioned by economic and institutional factors. Economic factors include
economic organizations (capitalist, socialist, individual ownership, company
ownership, and Government ownership), capital structure and technology,
nature and composition of labour force, demand and supply of labour.
Institutional factors refer to state policy, labour legislation, employers’
organizations, trade unions, social institutions (community, caste, joint
family, and religions), attitudes to work, power and status systems,
motivation and influence, etc.

7. Several parties are involved in the employer-employee relations system. The

main parties are employers and their associations, employees and their
unions, and the Government. These three groups interact within the
economic and social environment to shape the employer-employee relations
system.

8. The main purpose of employer-employee relations is to maintain

harmonious relationships between management and labour. The focus in
these relationships is on accommodation. The parties involved develop skills
and methods of adjusting to or cooperating with each other. They also
attempt to solve their problems through collective bargaining. Every
employer-employee relations system creates a complex set of rules,
regulations and procedures to govern the workplace.

Industrial Relations (IR)

The term industrial relations explain the relationship between employees and
management which stem directly or indirectly from union-employer relationship.
Industrial relations are the relationships between employees and employers within
the organizational settings.

Basically, IR sprouts out of employment relation. Hence, it is broader in meaning

and wider in scope. IR is dynamic and developing socio-economic process. As
such, there are as many as definitions of IR as the authors on the subject. Some
important definitions of IR are produced here.
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According to Dale Yoder’, IR is a designation of a whole field of relationship that

exists because of the necessary collaboration of men and women in the
employment processes of Industry”.

Nature of Industrial Relation

(i) To create healthy relations between employees and employers.

(ii) To minimize industrial disputes.

(iii) To generate harmonious relations among all concerned with production

process.

(iv) To improve the productivity of workers.

(v) To provide workers their appropriate position by considering them partners and
associating them with management process.

(vi) To provide the workers their due profit share, improve their working
conditions and thereby eliminating the chances of strikes and lockout etc.