Compensation Lecture 1

COMPENSATION
MANAGEMENT
Facilitator: K.Allen
August 4, 2024
Objectives
At the end of this session, participants
should be able to:
• Define compensation.
• Discuss the factors that
influence compensation.
• Explain the importance of
compensation strategies.
• Develop a strategic compensation
plan
What is compensation?
• Compensation is defined as
the total amount of the
monetary and non-monetary
pay provided to an
employee by an employer in
return for work performed as
required.
What is compensation?
• It is a combination of the
value of pay, vacation,
bonuses, health insurance.
• It is also perks received, such as
free lunches, free events, and
parking.
• These components are involved
when compensation is defined.
DISCUSSION
•What kind of perks an
organization could offer to
complement compensation
and motivate employees
Factors of
Compensation
Compensation is based on
numerous factors such as:
• Market Research about the
worth of similar jobs
• Employee contributions
and accomplishments
• The availability of employees
with like skills in the
marketplace
Factors of
Compensation
• The desire to attract and
retain a particular
employee.
• The profitability of the company
or the funds available in a non-
profit or public sector setting
• The employee’s previous salaries
Factors affecting
Compensation
Compensation management is one of the primary functions of
HR, as it plays a crucial role in attracting and retaining top
talent. The compensation awarded to the employee is dependent
on the volume of effort exerted, the nature of job and his skill.
Besides, there are several other internal and external factors
affecting the compensation. Here are some of the key factors that
affect compensation management:
 Productivity of workers
 Ability to pay
 Government policies/control and legislation
 Labour unions
 Cost of living
 Demand and supply of labour
 Industry standards
 Economic conditions
 Prevailing wage level
 Society
 Labour unions
 Globalization
Uses of Compensation
• Compensation is a tool used by
management for a variety of
purposes to further the existence
of the company.
Uses of Compensation
Compensation may be used to:
• recruit and retain qualified employees.
• increase or maintain
morale/satisfaction.
• reward and encourage peak
performance.
• achieve internal and external equity.
• reduce turnover and encourage
company loyalty.
Types/Forms of
Compensation
Compensation may include
payments such as:
• Bonuses
• Profit sharing.
• Overtime pay.
• Recognition rewards
• Sales commission
Compensation
Compensation can also include non-
monetary perks such as:
• A company-paid car
• Stock options.
• Company-paid housing
• and other non-monetary income
items
Compensation Strategy
• A Compensation Strategy is
used to determine how the
resources available for rewards
programmes can be used to
best advantage in attracting,
motivating, and retaining
employees.
• Must be aligned to the
business strategy
• The greater the alignment
of the business strategy and
the compensation strategy
the more effective the
organization
• When business strategies
change compensation
strategies should also change
• A compensation strategy should
influence employees to make
personal decisions.
that are congruent with the
organization’s needs. Generally, it
should:
• Motivate people to join the
organization.
• Motivate employees to perform at
the top of their skill set.
• Motivate employees to stay.
Developing A Compensation
Strategy
• Before designing and
implementing a compensation
plan, one must first develop a
clear and compelling
compensation strategy.
• To develop a successful
compensation strategy, one
may take the following steps:
Developing A Compensation
Strategy
• Define your compensation philosophy.
• Link compensation to your
overall business strategy.
• Change the culture and reinforce
it with compensation.
• Reward the behaviours that
drive the results.
• Think total compensation.
• Measure your return on invested
payroll.
An organization’s
compensation strategy can
be to:
• Lead
• Meet or
• Lag the market.
Compensation Strategy - Lag The
Market
• An organization may choose to
offer a compensation package
that is valued less than packages
offered for a similar job in the
Labour market.
• An employer with a “lag the
market” philosophy is likely to
be at the back of the line when it
comes to hiring and retaining
employees, especially those with
special skills.
Market
• Employees are less willing to

stay and support an
organization when they know
they are underpaid.
• Good employees may leave,
while less-skilled employees
may stay with the organization
Market
• Turnover is very expensive

• No organization wants to be a
training ground to groom
employees for its competitors
Compensation Strategy - Meet The
Market
• This is the most
common
compensation
strategy.
• This level of competitiveness
occurs when an organization’s
compensation strategy is equal
to the labour market for the
same position
• This is the pay philosophy that
makes the most sense for most
organizations
Compensation Strategy - Meet The
Market
• By having a base pay strategy
that meets the market, an
employer can easily add or
subtract variable pay and/or
fringe benefits
• By selecting this level,
employers can balance cost
pressures and the need to
attract and retain employees
Compensation Strategy - Lead The
Market
• The “lead the market” pay
strategy can be defined as a
total compensation package
that is above the labour market
for a similar position.
• This strategy may occur because
an organization believes that by
paying more, it will receive more
experienced employees for the
same position
Compensation Strategies
Why Is Having a Compensation Strategy Important?
Your compensation strategy sets your position in the market and can
impact your employer brand. A compensation strategy is important for your
company to:
 Attract top talent. An enticing compensation strategy can help you
establish your company’s position as the employer of choice within your
market.
 Boost morale. A sound compensation strategy leaves your employees
feeling valued and appreciated as an important part of the company.
 Increase productivity. Providing an employee-friendly compensation
package can help incentivize employees to give their best and increase
their level of productivity.
 Retain your employees. Offering a generous compensation package can
help keep your employees happy and convince them to remain with your
company.
Questions - Compensation Strategies
• Is the organization able to
attract the appropriate skill sets
and types of employees when
needed?
• How long do most employees stay
at the organization?
• Where do employees go when they
leave the organization?
• Are employees frequently asked to
take on new tasks without being
rewarded for their efforts?
Questions - Compensation
Strategies
• Do employees value the company’s
benefits, incentives, work
environment? What of these items
should be changed or updated?
• What is the employee morale?
This information can be gathered
from managers, exit interviews,
employee surveys and other
communication tools.
Any Questions

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COMPENSATION

• Employees are less willing to

• Turnover is very expensive

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