COMPENSATION MANAGEMENT

Dr. Niharika Singh

 Compensation – Philosophy
 Nature and Purpose

 Types of Wages & Wage plans,

 Compensation Design

 Job Evaluation

 Process & Methods of Job Evaluation,

 Pay Structures in India

 Government Regulation of Compensation

 Compensation
 Remuneration

 Wages

 Salary
 A compensation philosophy is a formal
statement that outlines an organization's
approach to employee compensation, guiding
how pay structures are developed and ensuring
alignment with the company's overall goals and
values.
 Ex- "We prioritize performance-based rewards to
drive productivity”
 A compensation philosophy articulates the
reasons behind the compensation strategies
adopted by the organization. It aims to attract,
retain, and motivate employees while ensuring
fairness and equity in pay practices.
 Example:
Basecamp: This project management software
company employs a location-agnostic pay,
offering the same salaries based on seniority
level regardless of employees' geographical
locations. This approach rewards employees
based on their work value rather than their
location.
Buffer- social media management platform, has
adopted a transparent compensation
philosophy guided by principles of simplicity
and fairness. This structured, straightforward
approach aims to minimize bias in compensation
decisions and address the gender wage gap.
 Compensation policy should be aligned with
business strategy
Home Depot: Pay for Performance (customer
oriented)

Strategy: include delivering exceptional customer

service
COMPENSATION DESIGN
 A high-level statement outlining the
organization's beliefs and values regarding
employee compensation.- Compensation
Philosophy
 The actual process of structuring and
implementing compensation strategies and
plans.- compensation design
 This includes determining salary ranges, bonus
structures, benefits offerings, and other forms of
compensation that fit within the framework set
by the compensation philosophy
For instance:
Philosophy: "We aim to offer competitive market
pay and rewarding innovation."
Design: Introduce market-aligned salary bands,
stock options for innovation, and quarterly
performance bonuses.
Steps in designing compensation plan:
1. Develop a Compensation Philosophy

2. Job Analysis and Evaluation

3. Analyze market standards

4. Understand employee needs / performance

5. Develop compensation strategy (compensation

mix and pay structure)
6. Ensure legal compliance

7. Communicate the plan

8. Monitor and adjust

 Purpose?
NATURE OF COMPENSATION
Monetary and Non-Monetary
Monetary Compensation: Direct financial
rewards such as salaries, wages, bonuses, and
commissions.
Non-Monetary Compensation: Indirect rewards
like healthcare benefits, retirement plans, work-
life balance initiatives, and recognition programs.
Fixed and Variable
Fixed Compensation: Guaranteed payments like
base salary or hourly wages, unaffected by
performance.
Variable Compensation: Performance-based
rewards, such as bonuses, profit-sharing, or sales
commissions, which depend on individual or
organizational success.
 Individual and Collective
Individual Compensation: Tailored to an
employee’s role, skills, experience, and
performance.
Collective Compensation: Benefits provided to
all employees as part of company-wide policies,
like insurance or retirement plans.
Short-Term and Long-Term
 Short-Term Compensation: Immediate
rewards such as monthly salary or quarterly
bonuses.
 Long-Term Compensation: Benefits designed
to retain employees, like stock options, pensions,
or long-term incentive plans.
Regulatory and Ethical
 Compensation practices must adhere to labor
laws, minimum wage regulations, tax policies,
and equal pay standards.
 Ethical considerations include pay equity,
transparency, and fairness.
Dynamic Nature
 Compensation evolves with market trends,
industry standards, organizational needs, and
employee expectations.
 Employers must regularly review and adjust
compensation structures to stay competitive.
PURPOSE OF COMPENSATION
 Attracting Talent
 Retaining Employees

 Motivating Performance

 Ensuring Equity and Fairness

 Supporting Employee Well-being

 Driving Organizational Goals

 Rewarding and Recognizing Efforts

 Complying with Legal Standards

 Encouraging Skill Development

 ACTIVITY

Trends in Compensation
THEORIES OF
COMPENSATION/REMUNERATION

 Reinforcement
 Expectancy (VIE) Theory

 Equity Theory

Internal equity: perceived fairness of pay

differentials among different jobs within an
organization
External equity: perceived fairness of
remuneration in relation to outside the
organization
Individual equity: : perceived fairness of pay
differentials among identical jobs within an
organization
 Agency theory:
Employee- agent
Employer- principal
Wages paid to employee-agency cost
Align interest and goal of both the stakeholders
FACTORS INFLUENCING REMUNERATION:
 External factors
1. Labour market

2. Cost of Living

3. Labour Unions

4. Labour Laws

5. Society

6. The Economy

 Internal factors

 Business strategy

 Job evaluation and performance appraisal

TYPES OF WAGE
 Refers to the various forms or categories of monetary
compensation paid to employees.

 Minimum wage: which provides for bare sustenance +

preservation of efficiency of worker (education,
medical)
Legally Binding
Minimum wages Act, 1948
 Fair Wage: that reflects the value of work while
considering industry standards.
 Living wage: provide for bare minimum + comfort
Protection for old age, insurance, essential social
needs.
 Piece-Based Wages: Payment based on the number of units
or tasks completed.
 Wage in Kind: Non-monetary compensation such as
housing, meals, or transportation.
WAGE PLANS
 Refers to the specific systems or strategies
designed to calculate and distribute wages.

Time Rate Plan

Wages are paid based on the time worked.
Usage: Suitable for jobs where output cannot be
easily measured.

Piece Rate Plan

Payment is based on the number of units produced.
Usage: Common in manufacturing and production.
 The differential piece rate plan
Introduced by Frederick Taylor, builds on the
straight piece rate system by offering varying
rates based on performance levels.

Incentive Plan


Additional rewards for achieving performance

targets.
 Halsey Plan
The Halsey Plan is a wage incentive system designed to
encourage productivity by providing workers with a
guaranteed minimum wage while also rewarding them for
completing tasks more quickly than the standard time.

Developed by Frederick A. Halsey, this plan addresses

some of the limitations of traditional piece-rate systems by
ensuring that workers receive compensation even if they do
not meet production targets.
Rowan Plan
developed by James Rowan
- standard time
- guaranteed minimum wage
 Commission Plan
 Payment based on a percentage of sales made.

 Real estate agents earning a commission per

sale.

Incentive vs Bonus vs Commission

JOB EVALUATION
 It is the systematic process of evaluating jobs to
determine the relative worth of the job.
FEATURES OF JOB EVALUATION
 1. Tries to evaluate jobs, not people
 2. Standard are relative, not absolute

 3. Basis of job evaluation is job analysis

 4. Carried on by groups and not individuals

 5. Degree of subjectivity is also present

OBJECTIVES OF JOB EVALUATION
1. To determine the place of a job
2. To manage internal and external consistency in
compensation.
3. To assure transparency of compensation
4. To ensure employee satisfaction with respect to
compensation
5. To avoid discrimination of any kind
PROCESS OF JOB EVALUATION
1. Identify the Purpose of the Evaluation
- determining pay scales, identifying training
needs, or making promotion decisions.
2. Analyze the job related information
3. Job Description and Specification
4. Selection of job dimension- factors to be used to
evaluate jobs
5. Evaluate the jobs-
Evaluate jobs based on the factors.
Use one of the methods for job evaluation- non-
qualitative or qualitative
6. Classify the jobs-
Based on evaluation, you create job levels and
assign compensation
7. Implementation
8. Maintenance-Modification, when and where
needed
METHODS OF JOB EVALUATION
 Qualitative Methods:
1. Ranking Methods
• Simplest and oldest
• prepare brief job description and assign ranks
• 1a. Relative Ranking- identify a key
representative and compare all other job with it
• 1b. Paired Comparison-
• 1c. Single Factor Ranking- single most important
factor is determined and jobs are compared based
on that single most factor.
2. Job Classification or Job Grading
Grades are formulated on the basis of nature of tasks
and responsibilities.
Jobs are classified and graded based on their
significance and their worth to the organization.

In case of ranking, based on job description ranks are

given to job.
In case of job classification, grades are created (Level I,
Level II) and then jobs (based on job description) kept
in each grade.
Quantitative Methods:
1. Point Rating Method (Or Point System Method)
 A quantitative scale is developed to evaluate the jobs.
 Different scale might be required to evaluate different
jobs.
 Steps in Point method:
1. Determining the job factors or compensable factors
Those characters of job which are expected to be important
and are common for all jobs to be evaluated.
2. Determining the sub factors

Job factors have broad meaning, therefore sub factors are

taken to be more specific.
Experience (Computer knowledge): Experience of
working with SPSS
3. Define the degree statements or profile
statements: it describes the importance of each
sub factor
4. Assign points to factors, sub factors or degree

Based on the importance, points to be assigned.

Experience Degree I Degree II Degree III Degree IV
(with SPSS) (1-6 (6-12
months) months)
20 40
5. Preparation of a Chart:
A chart is prepared with value for each factor and
sub factor, degree and points assigned.
6. Applying the Point System:
Experts compare job description with the points
assigned
The points are used to determine the level of each
job.
2. Factor Comparison Method
- Sophisticated and quantitative technique of job
evaluation
- Based on the point of point rating and relative
ranking

- Steps:
1. Determine the specific factors across different
job
- Developed by Thomas E. Hitten
- Five factors are evaluated-

Mental efforts
Skills
Physical efforts
Responsibilities
Working Condition

2. Identify the key or benchmark jobs which have

an established pay rate in the organization
3. Factors in each benchmark jobs are identified
and assigned point and monetary value (called
factor evaluation)
4. Evaluate all jobs in comparison to benchmark
jobs
5. Establish job ranking and pay structure
6. Review and Adjust
 Minimum Wages Act, 1948
 Payment of Wages Act, 1936

 Equal Remuneration Act, 1976

 Payment of Gratuity Act, 1972

 Employees' Provident Funds and Miscellaneous

Provisions Act, 1952