CHRP – Module 6 - Strategic Pay Plans
Compensation Management Theories
There are three main theories that are used by human resource professionals when
developing compensation management plans:
1. Behavior Reinforcement Theory
2. Equity Theory
3. Agency Theory
Reinforcement and Expectancy Theories
The reinforcement theory postulates that a behavior which has a rewarding
experience is likely to be repeated. The implication for remuneration is that high
employee performance followed by a monetary reward will make future employee
performance more likely. By the same token, a high performance not followed by a
reward will make its recurrence unlikely in future.
The theory emphasizes the importance of a person actually experiencing the reward.
Like the reinforcement theory, Vroom’s expectancy theory focuses on the link
between rewards and behavior. Motivation, according to the theory, is the product of
valence, instrumentality and expectancy. Remuneration systems differ according to
their impact on these motivational components. Generally speaking, pay systems
differ most in their impact on instrumentality the perceived link between behavior
and pay. Valence of pay outcomes remains the same under different pay systems.
Expectancy perceptions often have more to do with job design and training than pay
systems.
Equity Theory
Adam’s equity theory says that an employee who perceives inequity in his or her
rewards seeks to restore equity. The theory emphasizes equity in pay structure of
employees’ remuneration. Employee’s perceptions of how they are being treated by
their firms are of prime importance to them. The dictum ‘a fair day work for fair day
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 1
pay a sense of equity felt by employees. When employees perceive inequity, in can
result in lower productivity, higher absenteeism or increase in turnover.
Agency Theory
This theory states that both the employer and the employee are the stakeholders of the
company, and the remuneration paid to the employee is the agency cost. The employee
will try to get an increased agency cost whereas the employer will try to minimize it.
Hence, the remuneration should be decided in such a way that the interest of both the
parties can be aligned.
Thus, these theories posit that the compensation in the form of salary or wages can be
decided on the basis of the outcome or the behavior of an employee.
Total Rewards
Total rewards are a combination of monetary and non-monetary benefits and other
rewards an employee receives based on how well he or she perform their tasks. A total
rewards strategy allows to reward employees with various forms of compensation fairly
and transparently.
Categories of Total Rewards
Total rewards are the total amount of money an employee receives from the company in
exchange for their work. Total rewards can be divided into categories:
• Compensation
• Benefits
• Performance incentives
• Quality of Work life
• Career Development
• Rewards & Recognition programs
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 2
Employee Value Proposition (EVP) is the balance of the rewards and benefits that are
received by employees in return for their performance at the workplace. The employee
value proposition (EVP) is rapidly gaining importance in organizations as it plays a key
role in attracting, engaging, and retaining top talent and elevating your entire employer
brand.
An employee value proposition is the unique value you offer as an employer to your
employees in return for their skills, experience, and commitment to your company. This
includes components like salary, benefits, rewards, career development, and work-life
balance, as well as your values, mission, social purpose, and organizational culture.
Direct financial compensation is widely known and recognized form of compensation.
Most sought after by workers, direct compensation is the money which is paid directly to
employees in exchange for their labor. This includes everything from hourly wages, to
set salaries, bonuses, tips and commissions.
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 3
Indirect financial compensation includes all monies paid out to an employee that are not
included in direct compensation. This form of compensation is often understood as the
portion of an employee’s contract that covers items such as temporary leaves of
absence, benefits and retirement plans.
Non-monetary compensation differs from direct and indirect pay as it has no monetary
value. Non-financial incentives are the types of rewards that are not a part of
an employee’s pay. Non-monetary incentives are typically effective for employees who
are comfortable with their salaries or have been in a position for a long
time. Compensation if this nature can include Achievement awards,
team leadership opportunities, personal days, prizes, paid training, gift cards, new
office or workspace upgrade or even paid parking or transit passes
Job evaluation is the process of assessing the value or worth of a particular job within an
organisation. It involves comparing a job’s duties, responsibilities, and required skills
with those of other jobs in the company to determine its appropriate place in the
organisation’s hierarchy and pay scale. There are several methods used by organisations
to evaluate jobs. These methods include the classifying method, the ranking method,
factor comparison method, and the point method.
Job ranking
This method requires you to rank each role in a hierarchy based on the value they bring
to the company or how difficult the role's duties are. Job ranking is a good job evaluation
method for smaller companies as it is simple, and you can consider up to 100 jobs. It is
also a good method for reducing positions as you can pair similar roles together when
ranking them and choose to keep the one that has the biggest impact on the company. The
job ranking method has limitations as it is subjective, so combining it with a quantitative
method can help make the results more accurate.
Job classification
The job classification method first requires you to develop a grading system or
classification method to help you sort roles. For example, you could create the following
four categories: executives, skilled workers, semiskilled workers, and unskilled
workers. Then, sort each role into a category, helping you determine the salary for each
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 4
position in that category. This method is also subjective and it can be hard to fit every
unique role into a category.
Point factor
With the point factor method, you evaluate jobs by assigning each role points and then
rank them. Start by developing a detailed point system. For example, every skill a
position requires could be a point, or each job responsibility could be a point. Once you
have your point system, you can go through each role and assign it a total number of
points. Then, rank the jobs from the highest number of points to the lowest to help you
determine their salaries.
Factor comparison
The factor comparison method is a combination of the job ranking and point factor
methods. Start by ranking each job based on certain factors, such as the number of skills
each role requires or the knowledge candidates need to have. Then, assign these factors
points. The total number of points each role has determines the job's ranking.
Overall, the choice of evaluation method will depend on the specific needs and goals of
the organisation. Some methods may be more suitable for particular jobs or industries,
while others may be more appropriate for different organisational structures or
cultures.
The 5-step Job Evaluation Process
The specific steps involved in an evaluation process will depend on the method used and
the organisation’s particular needs and goals. However, here are five general steps that
are typically followed in a job evaluation process:
1. Identify the purpose of the evaluation
The first step in the process is to clarify the specific goals that the organisation hopes to
achieve through the job evaluation. This may include determining pay scales, identifying
training and development needs, or making decisions about promotions and career
advancement.
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 5
2. Select the appropriate evaluation method
The next step is to choose the most suitable method for evaluating the jobs within the
organisation. Different ways may be more appropriate for different types of jobs or
industries, organisational structures, or cultures. Some standard job evaluation methods
include ranking, classifying, point evaluation, factor comparison, grading, and skill-
based pay.
3. Gather job-related information
The third step is to gather detailed information about the duties, responsibilities, and
required skills of each job being evaluated. This may involve reviewing job descriptions,
observing employees performing their tasks, and gathering input from employees,
supervisors, and other stakeholders.
4. Analyse the job-related information
Once the job-related information has been gathered, it must be analysed to determine
each job’s relative value or worth. This may involve comparing the duties and
responsibilities of each job with those of other positions within the organisation or using
a specific job evaluation method such as ranking, classifying, or point evaluation.
5. Determine pay and other compensation
Based on the job evaluation results, the organisation can then determine the appropriate
payment and further compensation for each job. This may involve establishing pay
scales or ranges, setting individual pay rates, or making decisions about bonuses or other
incentives. The job evaluation results should also be communicated to employees and
other stakeholders to ensure transparency and understanding.
Monetary and non-monetary incentives, career advancement opportunities, peer
recognition programs, and special projects or assignments are the most common types of
employee incentives. By using a combination of these incentives, employers can create a
positive and motivating work environment that encourages high performance and
employee satisfaction.
Creating an effective incentive program requires careful planning and consideration of
the goals, types of incentives, achievable targets, effective communication, monitoring
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 6
and evaluation, regular feedback, and ensuring equity. By following these steps, you can
create an incentive program that works for all employees and helps to improve their
performance and motivation.
Elements of Total Rewards
Base Pay
• Fixed salary you receive in exchange of your contributions
• Influenced by your performance
• Internal and external equity
• Competitive at the market place
Employee development
• Help you reach your fullest potential
• Employee driven and manager supported
• Training calendar, leadership interventions, coaching/mentoring
Meaningful work
• Part of diverse global team committed to supporting higher quality of life around
the world
• Clear goals with linkage to Organizational objectives
• Diversity, inclusion, teamwork
Variable Pay
• Potential for exceptional pay when company performance is exceptional
• Positions us at top quartile of the market
Benefits
• Provide market competitive benefits
• Individual flexibility for additional cover
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 7
• We provide multitude of benefits, some of which are time/location flexibility, term
life insurance, medical cover, accident cover, superannuation program, National
Pension System, Car lease policy, sabbatical etc.
Credible Leadership
• Create a compelling vision for future success
• Act with character and integrity, demonstrating our core values
• Have the knowledge skills and ability to advance our great company
• Support diversity and inclusion
Well-being
• Committed to your health and safety, on and off the job
• Focus on overall well-being, including physical, emotional, spiritual, financial
well-being
Recognition
• Propagate a culture of recognition
• Appreciate employee contributions
• Foster team work and high performance culture
Here are the 5 most common types of employee incentives:
1. Monetary Incentives: This includes bonuses, commissions, profit sharing, and
stock options. These incentives provide direct financial benefits to employees and
can be tied to individual or team performance.
2. Non-Monetary Incentives: Non-monetary incentives include recognition
programs, paid time off, flexible schedules, and company perks. These incentives
provide indirect benefits to employees and can improve job satisfaction and
work-life balance.
3. Career Advancement Opportunities: Employees value opportunities for career
growth and development. Providing training, mentorship, and clear paths for
advancement can motivate employees to perform at a high level.
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 8
4. Peer Recognition Programs: Peer recognition programs allow employees to
recognize and reward their colleagues for outstanding performance. This can
promote a positive and collaborative work culture and increase employee
engagement.
5. Special Projects or Assignments: Giving employees the opportunity to work on
special projects or assignments can be a powerful incentive. These projects can be
challenging and rewarding, providing employees with a sense of accomplishment
and satisfaction.
Profit-Sharing Plans
Profit-sharing plans offer direct or indirect payment employees depending upon the
profitability of organisation along with the usual bonus and salary. However, these plans
involve allotment of shares to employees in case of publicly traded organisations.
Principal objective of profit sharing is to exchange the monetary achievement of the
organisation with employees and give them an identity.
Deferred Payment Plan
In this plan, employee's part in the profit is either given to a 'trust' which maintains it until
retirement, or it is given to the employee in small installments. If the employee dies, the
amount is given to the desired beneficiaries and if he is terminated in the middle of his
tenure, ensured amount is deposited in the trust is returned to him. This plan
counterbalances the inflationary trends.
Stock Options
It provides the holder the right to buy shares of stocks at a fixed rate in future. Whatever
be the price of the stock in the market, if a person uses his option of stock, he will get the
share predetermined rates. If the person redeems his stock when the market price is high
then the person w make profits. If the value is lower, then the stock option would not be
beneficial. This option is almost always beneficial for those organisations in which the
possibility of growth is high. It also helps to motivate and maintain good quality of human
resources. Long-term and short-term business goals are also achieved with the help of
these plans.
Employee Stock Ownership Plan (ESOP)
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 9
ESOP is a benefit plan which makes it possible for the employees to become the owners of
stock of their organisation. It is a method of selling the organisation to its employees,
instead of selling it to the outside investors or to any other organisation.
The objective of this document is to assist you recall the concepts taught in class; nevertheless, to fully grasp the
topics, please take the time to research on the topics (sources are provided in the slides) – Jessie Joy pg. 10
