HRD PROF 312 Management Module

COMPENSATION AND BENEFITS

HR Management Strategy Model:
Human resource department uses different strategies to manage the workforce so that the desired results
can be attained. These desired result can be attained if organization is able to attract, select, develop and retain
workforce in successful manner in short, the effective hiring and retaining workforce can be helpful in achieving
organizational goals. This purpose can be attained through fair and effective rewards systems in the organization.
Rewards are used as basic motivational tools in the organization so that performance of the employees can be
influenced in desirable way. So to be more successful organizations need attractive and fair compensation and
reward systems to be paid to the workforce.
Pay is a statement of an employee’s worth by an employer. Or Pay is a perception of worth by an
employee
Job Pricing
Job pricing means placing a peso value on the worth of a job.
1. Pay Grades—the grouping of similar jobs together to simplify the job pricing process. Plotting jobs on a
scatter diagram is often useful in determining the appropriate number of pay grades.
2. Wage Curve—the fitting of plotted points in order to create a smooth progression between pay grades.
3. Pay Ranges—includes a minimum and maximum pay rate with enough variance between the two to allow
some significant pay difference.
4. Broad Banding—a technique that collapses many pay grades (salary grades) into a few wide bands in
order to improve organizational effectiveness.
5. Single-Rate System—pay ranges are not appropriate for some workplace conditions. When single rates
are used, everyone in the same job receives the same base pay, regardless of seniority or productivity.
This rate may correspond to the midpoint of a range determined by a compensation survey.
6. Adjusting Pay Rates—when pay ranges have been determined and jobs assigned to pay grades, it may
become obvious that some jobs are overpaid and others underpaid. Underpaid jobs normally are brought
to the minimum of the pay range as soon as possible.

Compensation
i. Compensation—the total of all rewards provided employees in return for their services.
ii. Direct Financial Compensation—consists of the pay that a person receives in the form of wages, salaries,
bonuses, and commissions.
iii. Indirect Financial Compensation—all financial rewards that are not included in direct compensation.
iv. Non-financial Compensation—consists of the satisfaction that a person receives from the job itself or from
the psychological and/or physical environment in which the person works. All such rewards comprise a
total compensation program.

I. Equity in financial compensation:

Organizations must attract, motivate, and retain competent employees. Because achievement of these goals
is largely accomplished through a firm’s compensation system, organizations must strive for compensation equity.
a. Equity—Workers’ perceptions that they are being treated fairly. Compensation must be fair to all parties
concerned and be perceived as fair.
b. External Equity—Exists when a firm’s employees are paid comparably to workers who perform similar
jobs in other firms.
c. Internal Equity—Exists when employees are paid according to the relative value of their jobs within an
organization.
d. Employee Equity—Exists when individuals performing similar jobs for the same firm are paid according to
factors unique to the employee, such as performance level or seniority.
e. Team Equity—Achieved when more productive teams are rewarded more than lessproductive teams.

1… “Practice without theory is blind.”

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II. Determinants of individual financial compensation:

Compensation theory has never been able to provide a completely satisfactory answer to what an
individual is worth for performing jobs.
• The Organization,
• The Labor Market
• The Job, and
• The Employee
These all have an impact on job pricing and the ultimate determination of an individual’s financial compensation.
a. The Organization as a Determinant of Financial Compensation:
 Compensation Policies—an organization often establishes—formally or informally—compensation policies
that determine whether it will be a pay leader, a pay follower, or strive for an average position in the labor
market.
1. Pay Leaders: Those organizations that pay higher wages and salaries than competing firms.
2. Market Rate or Going Rate: The average pay that most employers provide for the same job in a particular
area or industry.
3. Pay Followers: Companies that choose to pay below the market rate because of poor financial condition
or a belief that they simply do not require highly capable employees.
 Organizational Politics—Political considerations may also enter into the equation. A sound, objective
compensation system can be destroyed by organizational politics. Managers should become aware of this
possibility and take appropriate action.
 Ability to Pay—An organization’s assessment of its ability to pay is also an important factor in determining pay
levels. Financially successful firms tend to provide higher-than-average compensation. However, an
organization’s financial strength establishes only the upper limit of what it will pay.
b. The labor market as a determinant of financial compensation:
Potential employees located within the geographical area from which employees are recruited comprise
the labor market.
 Compensation Surveys—large organizations routinely conduct compensation surveys to determine prevailing
pay rates within labor markets.
1. Compensation surveys: Provide information for establishing both direct and indirect compensation.
2. Benchmark job: A job that is well known in the company and industry, one that represents the entire job
structure, and one in which a large percentage of the workforce is employed.
 Cost of Living—A pay increase must be roughly the equivalent to the cost of living increase if a person is to
maintain a previous level of real wages.
 Labor Unions—When a union uses comparable pay as a standard for making compensation demands, the
employer must obtain accurate labor market data. When a union emphasizes cost of living, management may
be pressured to include a cost-of-living allowance (COLA). This is an escalator clause in the labor agreement
that automatically increases wages as the U.S Bureau of Labor Statistics’ cost-of-living index rises.
 Society—Compensation paid to employees often affects a firm’s pricing of its goods and/or services.
Consumers may also be interested in compensation decisions.
 Economy—In most cases, the cost of living will rise in an expanding economy. Thus, the economy’s health
exerts a major impact on pay decisions.
 Legislation—The amount of compensation a person receives can also be affected by certain federal and state
legislation.
c. The job as a determinant of financial compensation:
Organizations pay for the value they attach to certain duties, responsibilities, and other job-related factors.
Techniques used to determine a job’s relative worth include job analysis, job descriptions, and job evaluation.
 Job Analysis and Job Descriptions—Before an organization can determine the relative difficulty or value of its
jobs, it must first define their content, which it normally does by analyzing jobs. Job analysis is the systematic

2… “Practice without theory is blind.”

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process of determining the skills and knowledge required for performing jobs. The job description is the
primary by-product of job analysis, consisting of a written document that describes job duties and
responsibilities. Job descriptions are used for many different purposes, including job evaluation.
 Job Evaluation—That part of a compensation system in which a firm determines the relative value of one job
compared with that of another.
d. The employee as a determinant of financial compensation:
In addition to the organization, the labor market, and the job, factors related to the employee are also
essential in determining pay and employee equity.
I. Performance Based Pay—PA data provide the input for such approaches as merit pay, variable pay, skill-based
pay, and competency-based pay.
1. Merit Pay: A pay increase given to employees based on their level of performance as indicated in the
appraisal.
2. Bonus: The most common type of variable pay for performance and is a one-time award that is not added
to employees’ base pay.
3. Skill-based Pay: A system that compensates employees on the basis of job-related skills and knowledge
they possess, not for their job titles.
4. Competency-Based Pay: A compensation plan that rewards employees for their demonstrated expertise.
II. Seniority—The length of time an employee has been associated with the company, division, department, or job
is referred to as seniority.
III. Experience—Regardless of the nature of the task, very few factors has a more significant impact on
performance than experience.
IV. Membership in the Organization—Some components of individual financial compensation are given to
employees without regard to the particular job they perform or their level of productivity.
V. Potential—Organizations do pay some individuals based on their potential.

e. Political Influence—Political influence is a factor that obviously should not be used as a determinant of financial
compensation. However, to deny that it exists would be unrealistic.

f. Luck—The expression has often been stated, “It certainly helps to be in the right place at the right time.”
There is more than a little truth in this statement as it relates to the determination of a person’s compensation.

g. Special Employee Classes—These include pay for executives, which are discussed in a later section, and pay
for professionals and sales employees.

III. Executive Compensation:

Executive skill largely determines whether a firm will prosper, survive, or fail. Therefore, providing
adequate compensation for these managers is vital. A critical factor in attracting and retaining the best managers
is a company’s program for compensating executives.
a) Determining Executive Compensation—In determining executive compensation, firms typically prefer to relate
salary growth for the highest-level managers to overall corporate performance. In general, the higher the
managerial position, the greater the flexibility managers have in designing their jobs.
b) Types of Executive Compensation—Executive compensation often has five basic elements:
(1) Base Salary.Salary is obviously important. It is a factor in determining standard of living. Salary also
provides the basis for other forms of compensation.
(2) Short-Term Incentives or Bonuses.Payment of bonuses reflects a managerial belief in their incentive value.
Today, virtually all top executives receive bonuses that are tied to base salary.
(3) Long-Term Incentives and CapitalAppreciation Plans,
(4) Executive Benefits, and

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(5) Perquisites. The way an executive compensation package is designed is partially dependent on the ever-
changing tax legislation.

BENEFITS
A. Total Compensation
Total compensation constitutes of two types of the rewards which are direct rewards and indirect rewards.
Direct rewards include the salaries wages, commission, bonuses and gain sharing all of these rewards are directly
paid to employees in monetary or financial terms, second type of the rewards are benefits provided by
organization. Benefits are not direct payments in financial terms.
B. Employee Benefits
Benefits are all financial rewards that generally are not paid directly to an employee. Benefits absorb
social costs for health care and retirement and can influence employee decisions about employers.

Mandated Benefits (Legally Required)

Although most employee benefits are provided at the employer’s discretion, others are required by law.
Legally required benefits include Social Security, unemployment compensation, and workers’ compensation.
1. Social Security—It is a system of retirement benefits that provides benefits like disability insurance, survivor’s
benefits, and, most recently, Medicare.
2. Unemployment Compensation—An individual laid off by an organization covered by the SocialSecurity Act
may receive unemployment compensation for up to 26 weeks. Although the federal government provides
certain guidelines, unemployment compensation programs are administered by the states, and the benefits
vary state by state.
3. Workers’ Compensation—Workers’ compensation benefits provide a degree of financial protection for
employees who incur expenses resulting from job-related accidents or illnesses.
4. Family And Medical Leave Act Of 1993 (FMLA)—The Family and Medical Leave Act applies t private
employers with 50 or more employees and to all governmental employers regardless of the number of
employees. The act provides for up to 12 workweeks of unpaid leave per year for absences due to the
employee’s own serious health condition or the need to care for a newborn or newly adopted child or a
seriously ill child, parent, or spouse.

Discretionary Benefits (Voluntary)

Organizations voluntarily provide numerous benefits. These benefits may be classified as (1) payment for
time not worked, (2) health and security benefits, (3) employee services, and (4) premium pay. Generally
speaking, such benefits are not legally required.
a. Payment For Time Not Worked—In providing payment for time not worked, employers recognize that
employees need time away from the job for many purposes, such as paid vacations, payment for holidays
not worked, paid sick leave, jury duty, national guard or other military reserve duty, voting time, and
bereavement time. Some payments are provided for time off taken during work hours, such as rest
periods, coffee breaks, lunch periods, cleanup time, and travel time.
• Paid Vacations: Payment for time not worked serves important compensation goals. Paid
vacations provide workers with an opportunity to rest, become rejuvenated, and hopefully,
become more productive.
• Sick Leave: Each year many firms allocate, to each employee, a certain number of days of sick
leave, which they can use when ill.
b. Health Benefits—Health benefits are often included as part of an employee’s indirect financial
compensation. Specific areas include health, dental, and vision care.

Security Benefits—Security benefits include retirement plans, disability insurance, life insurance, and
supplemental unemployment benefits.
4… “Practice without theory is blind.”
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 HRD PROF 312 Management Module

o Retirement Plans:
o Disability Protection:
o Supplemental Unemployment Benefits (SUB):
o Life Insurance:

Employee Services—Organizations offer a variety of benefits that can be termed employee services.
These benefits encompass a number of areas including relocation benefits, child care, educational assistance,
food services/ subsidized cafeterias, and financial services.
• Relocation Benefits:
• Child Care:
• Educational Assistance:
• Food Services/ Subsidized Cafeterias:
• Financial Services:
• Unique Benefits:
Premium Pay—Compensation paid to employees for working long periods of time or working under dangerous or
undesirable conditions.
• Hazard pay: Additional pay provided to employees who work under extremely dangerous conditions.
• Shift differentials: Paid to employees for the inconvenience of working undesirable hours.
Benefits for Part-Time Employees

Workplace Flexibility
Flexible work arrangements do more than just assist new mothers’ return to full-time work. They comprise
an aspect of non-financial compensation that allows many families to manage a stressful work/home juggling act.
a. Flextime—The practice of permitting employees to choose, with certain limitations, their own working hours.
b. Compressed Workweek—Any arrangement of work hours that permits employees to fulfill their work
obligation in fewer days than the typical five-day workweek.
c. Job Sharing—An approach to work that is attractive to people who want to work fewer than 40 hours per
week.
d. Flexible Compensation (Cafeteria Compensation)—Plans that permit employees to choose from among many
alternatives in deciding how their financial compensation will be allocated.
e. Telecommuting—Telecommuting is a work arrangement whereby employees are able to remain at home, or
otherwise away from the office, and perform their work over telephone lines tied to a computer.
f. Part-Time Work—Use of part-time workers on a regular basis has begun to gain momentum in the United
States. This approach adds many highly qualified individuals to the labor market by permitting both
employment and family needs to be addressed.
g. Modified Retirement—An option that permits older employees to work fewer than regular hours for a certain
period of time proceeding retirement. This option allows an employee to avoid an abrupt change in lifestyle
and more gracefully move into retirement.

B. The Role of Money

Money can be used as a motivational tool in the organization because it is used as a source to fulfill
different needs. It affects several needs, not just existence needs. Money is used to prove and enhance the
identity id people it influences the self-perceptions.
Improving Reward Effectiveness
Effectiveness of the rewards can be improved by considering the following factors.
a. Link rewards to performance
b. Ensure rewards are relevant
c. Use team rewards for interdependent jobs

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 HRD PROF 312 Management Module

d. Ensure rewards are valued

e. Beware of unintended consequences
I. Money as a Motivator
According to Maslow and Alderfer, pay should prove especially motivational to people who have strong
lower level needs. If pay has this capacity to fulfill a variety of needs, then it should have good potential as a
motivator.
II. Why People Leave Organizations:
Mostly people leave the organizations or organizations have to face high turnover rate due to different
reasons like employees are not satisfied with benefits provided or the recognition is not provided for extraordinary
perfumers these causes should be overcome so that employee loyalty can be increased. Following ways can be
used to avoid the high turnover of employees.
• Use Recognition
Some employees highly value day-to-day recognition from their supervisors, peers and team members
because it is important for their work to be appreciated by others. Recognition helps satisfy the need people have
to achieve and be recognized for their achievement.
• Use Positive Reinforcement
Positive reinforcement programs rely on operant conditioning principles to supply positive reinforcement
and change behavior. Experts claim it is better to focus on improving desirable behaviors rather than on
decreasing undesirable ones. There are a variety of consequences including social consequences (e.g., peer
approval or praise from the boss), intrinsic consequences (e.g., the enjoyment the person gets from
accomplishing challenging tasks), or tangible consequences (e.g., bonuses or merit raises).
• Empower Employees
Empowerment means giving employees the authority, tools, and information they need to do their jobs
with greater autonomy, as well as the self-confidence to perform new jobs effectively. Empowerment boosts
employees’ feelings of self-efficacy and enables them to use their potential more fully.

Challenges of Pay-for-Performance System

a) Pay for Performance: The Challenges
This section covers the attitudes that employees have about pay, the difficulties in measuring
performance, the psychological contract, lack of flexibility, the importance of credibility, job satisfaction, stress,
and the potential reduction of intrinsic drives.
i. The “Do Only What You Get Paid For” Syndrome: The closer pay is tied to particular performance indicators,
the more employees tend to focus on those indicators and neglect other important job components
ii. Negative Effects on the Spirit of Cooperation: Employees may withhold information from a colleague if they
believe that it will help the other person get ahead
iii. Lack of Control: Employees often cannot control all of the factors affecting their performance
iv. Difficulties in Measuring Performance: Assessing employee performance is one of the thorniest tasks a
manager faces, particularly when the assessments are used to dispense rewards
v. Psychological Contracts: Once implemented, a pay-for-performance system creates a psychological contract
between the employee and firm, and it is very resistant to change
vi. The Credibility Gap: Employees often do not believe that pay-for-performance programs are fair or that they
truly reward performance
vii. Job Dissatisfaction and Stress: Pay-for-performance systems may lead to greater productivity but lower job
satisfaction
viii. Potential Reduction of Intrinsic Drives: Pay-for-performance systems may push employees to the point of
doing whatever it takes to get the promised monetary reward and in the process stifle their talents and
creativity

6… “Practice without theory is blind.”

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