Strategic Compensation: A Component of Human Resource Management

Compensation Management
Topic
Strategic Compensation:
A component of Human Resource
System
Asif Ali Khaskheli

Learning Outcomes
What is Compensation
Objectives of compensation
Benefits of proper compensation
Consequence of Pay dissatisfaction
Classification of Compensation
Different aspects of compensation
Difference between compensation and reward
Direct and Indirect compensation
Benefits and Its different types
Theories of CompensationAsif Ali Khaskheli 2

Compensation
 Compensation is a systematic approach to
providing monetary & non monetary value
to employees in exchange for work
performed.
 Compensation is defined as money
received in performance of work and
many kinds of benefits that an
organization provides to their employees.
Asif Ali Khaskheli 3

Objectives of Compensation
 Focussing Employees Efforts
 Attracting Quality Employees
 To recruit & retain qualified employees.
 To Motivate Employees
 These objectives can be referred to with the
acronym FARM: focus, attract, retain,
motivate.

Benefits of Proper Compensation
o Compensation policy aims to attract talented employees
and motivate them to put their efforts and commitment
to work that increase job satisfaction work performance.
Benefits of Proper Compensation Administration
Attracts talent
Motivates Employees
Rewards Performance
Reduces Turnover
Manages Compensation Budget

Consequences of Pay Dissatisfaction
Grievances
Desire for
more pay
Pay
dissatisfaction
Performance
Strikes
Search for
new job
Lower
attractiveness
of job
Absenteeism
Turnover
Job
Dissatisfaction
Absenteeism
Psychological
withdrawal
Poor health
Visits to the
doctors
Source: Aswathappa. Human Resource Management, Text and Cases, 2008, p. 289Asif Ali Khaskheli 6

Compensation
Financial/Monetary
Direct
-Wage or salary
-Bonus
-Incentives
-Commission
Indirect
-Insurance Plan
-Social Security
Benefits
-Paid Leaves
-Services &
Perquisites
Non-Financial/Non-
Monetary
Job Position
-Challenges
-Authority
-Autonomy
Work
Environment
-Practice &
Policies
-Flexible
Scheduling
-Fun & Effective
Co-workers

Classification of Compensation
Direct compensation
• It refers to monetary benefits offered and
provided to employees in return of the services they
provide to the organization. The direct
compensation includes basic salary, wages, house
rent allowance, conveyance, leave travel allowance,
medical reimbursements, special allowances, bonus,
PF/Gratuity, etc. They are given at a regular interval
at a definite time.

Classification of Compensation
Indirect compensation
• It refers to non-monetary benefits offered and
provided to employees in lieu of the services
provided by them to the organization. They
include Paid Leave, Car/transportation, Medical
Aids and assistance, Insurance (for self and
family), Leave travel Assistance, Retirement
Benefits, Holiday Homes.

Base compensation
Wage:
• Remuneration paid by the employer for the services of hourly,
weekly & fortnightly workers doing manual or physical work.
• Usually given to unskilledworkers
• I t may also be defined as the compensation paid to blue collar
employees.
Salary:
• It refers to the remuneration paid to the officeemployees,
foremen, managers, professional and technical staff on a
monthly basis. Asif Ali Khaskheli 10

Indirect Financial Compensation
Benefits
Benefits are given to the employees that are other
than salary, wages and incentives.
These are the indirect financial compensation
components of the total compensation plan
Benefits are different from incentives as these are not
related with performance of the employees.
In some organizations “perk” is used rather than
benefits
Conventionally, perks denote those benefits which
are discretionary in nature and usually pay to the
senior level employees.Asif Ali Khaskheli 11

Different type of benefits
Mandatory Benefits
Fringe Benefits
Voluntary Benefits
Severance pay

Mandatory Benefits:
• These benefits give legal binding on the employer to include
provident fund, gratuity fund, health plan, maternity leave,
and medical leave to be giving to employees.
Provident Fund:
Workers contribute a portion of their
salaries into a provident fund and
employers must contribute on behalf
of their employees. The money in
the fund is then paid out to retirees.
In some cases, it's paid out to the
disabled who cannot work.
Gratuity Fund:
Gratuity fund is given by the
employer to an employee for the
services rendered by him during the
period of employment. It is usually
paid at the time of retirement but it
can be paid before provided certain
conditions are met.

Fringe Benefits:
• Fringe benefits are forms of compensation you
provide to employees outside of a stated wage
or salary. Common examples of fringe benefits
include medical and dental insurance, use of a
company car, housing allowance, educational
assistance, vacation pay, sick pay, meals,
Career counselling Paid memberships in
professionalorganizations and employee
discounts Asif Ali Khaskheli 14

Voluntary Benefits:
• Voluntary benefits are those insurance
products that an employee can purchase
from the employer at rates lesser than
those available in the market.

Severance Benefits:
• compensation paid by an organization to
an employee who leaves because, through
no fault of his own, the job to which he
was appointed ceases to exist, as during
rationalization, and no comparable job is
available to him

Factors Influencing Remuneration
Internal Factors External Factors
Organization Strategy Economy
Employee Characteristics &
Skills
Society
Job Evaluation Labor Market
Performance Appraisal Cost of Living
Labor Unions
LegislationAsif Ali Khaskheli 17

Challenges of Remuneration
Remuneration
Salary Reviews
Monetary and
non monetary
rewards
Skill based pay
Comparable
worth
Below market or
above market
pay
Egalitarianism
Employee
participation
Pay Secrecy

Theories Of
Compensation

Theories of Compensation
Positive Experience Behavior is repeatedBehavior rewarded
This theory is based on the assumption that, the reward-
earning behaviour is likely to be repeated.
For Instance: an employee would do the same thing again
for which he was acknowledged once.
Reinforcement Theory:

Employee set
expectations and goals
Performance is
rewarded
Employee consider
equity of reward and
performance
Feedback to employee
Employee sets new goals and expectations
based on experience
 Expectancy Theory:
In the case of Expectancy Theory, given by Victor Vroom,
the employee is motivated to do a particular thing for which he
is sure or is expected that performance will be followed by a
definite reward or an outcome.

Individual
equity
Internal
Equity
External
equity
Perception of
fairness
Motivation
Commitment
Performance
• Adam’s equity theory emphasizes to have equity in pay structure of
employee
• If employee feel that their efforts are well rewarded they will put more
efforts and will be satisfied with their job
• In case of inequity feeling they will be de moralized and dissatisfied
resulting into low productivity
 Equity Theory

Internal Equity: The employee perceives the fairness in different
pay for different jobs based on the nature of work involved, i.e. he
must feel that pay differentials among the jobs are fair.
External Equity: The employee should feel the fairness in
what they are being paid is in line with what other players in the
same industry are paying to their employees for the same kind
of job.
Individual Equity: The employee perceives the pay
differentials among the individuals who are performing the
same kind of a job and within the same organization. Usually,
an individual with more experience gets high remuneration as
compared to the fresher irrespective of the nature of a job.
 Equity Theory (Con…)

• In the organizations employer and employees are two main
stakeholders
• Employer act as principals and employees assume the role of
agent
• The remuneration of employee is agency cost
• Principal tries to minimize agency cost and agent expect to
have more agency cost
• The principal (Employer) should try to choose remunerating
schemes that align its own interest with expectation of agents
(employees)
• Behavior oriented (merit based pay)
• Outcome oriented (profit sharing, commission)
 Agency Theory:

Strategic Compensation: A Component of Human Resource Management

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Strategic Compensation: A Component of Human Resource Management