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ASSIGNMENT OF HUMAN RESOURCE MANAGEMENT

(HRM)

TOPIC: COMPANSATION MANAGEMENT

ALLAMA IQBAL OPEN UNIVERSITY


MBA MARKETING & MANAGEMENT

March 6th, 2019

SUBMITTED TO: SUBMITTED BY:

MR. NADEEM AHMED AWAN M. HAROON KHAN

ROLL NO: BU549995


COMPENSATION MANAGEMENT

Compensation describes the cash rewards paid to employees in exchange for the
services they provide. It may include base salary, wages, incentives and/or commission.
Total compensation includes cash rewards as well as any other company benefits.

Compensation strategy
Defining a compensation strategy is an important activity for all companies, including
startups. The compensation strategy must be affordable, structured and reasonably
competitive.
Your compensation strategy must be structured to best meet your unique business
circumstances. As a startup, you may not be able to compete with large companies on
salary. Therefore, you should consider a combination of options to attract and retain key
employees.

Do not underestimate the value of the advantages or perquisites that your company has
to offer that may not be readily available in larger companies—opportunities for
interesting work, lack of hierarchy, flexible environment, and so on.

Some people are motivated by the desire to be on the leading edge of scientific or
technological advances. They may take less pay to work for a startup if they believe in
its future and the work it has to offer.

Salary and wages


A salary (or wage) is a fixed amount paid in exchange for an employee’s services.
Ontario Employment Standards legislation entitles most employees to receive a
“minimum wage” in exchange for the work they complete for a company.

For full-time employees, salary is generally described in annual, monthly, bi-weekly or


weekly amounts. For part-time employees, it is generally described as an hourly
amount.

To determine an appropriate salary and/or salary range that your company is willing to
pay for a position, you must:

 Establish the value of the position based on your organizational requirements.


 Understand what the market is paying for a similar position.

Incentives: Drivers in attracting the best employees


Compensation can be divided into salary, benefits and incentives. While salary and
benefits must be competitive, incentives are the most likely drivers of attracting and
retaining the best employees in startups. There are three key types of incentives:
bonuses, profit sharing and stock options.
Bonuses
 Individuals are rewarded based on attainment of performance-based goals
(individual, team and/or company).
 Goals must be realistic and closely matched to the business and people involved.
 Payout potential should be large enough to be significant to the individual.
 Bonuses can be set up to directly drive and support the company’s needs (for
example, profitability, annual results, successful completion of projects and/or
significant project milestones).

Profit sharing
 Payment is tied to company profits.
 A pre-determined percentage of profit is shared among all employees.
 Profit-sharing bonuses are generally paid out once a year in the form of cash or
on a deferred basis.

Stock options
 An individual receives the option to buy company shares for a set price during a
specified time frame.
 Option can be exercised by the individual at any time during the agreed-upon
term and subject to any vesting schedule.
 Stock options are often part of management’s executive compensation but may
be offered to key employees in lieu of a higher salary—especially where the
business is not yet profitable and/or cash flow is constrained.
 If the business does well and the company’s stock rises, the holders of the
options share in the financial benefits.
 In general, if the company permits a long period from the date of issue to the last
date for exercising the option, it will encourage the employee to stay with the
company and be fully committed to its success.

Commissions
Commissions are a common way to remunerate employees (salespeople) for securing
the sale of a product or service. The intent is to create a strong incentive for the
individual to invest the maximum effort into their work. Commissions are usually
calculated as a percentage of the sale of the product or service (for example, 5% of a
computer component’s retail selling price).
Payment may be either straight commission (no base salary) or a combination of base
salary and commission. In general, the commission structure is based on reaching
specific targets or quotas that have been previously agreed upon by management and
the employee. These targets or quotas are typically tied to sales revenue, unit sales or
some other volume-based metric.

Retirement Plans
Retirement and pension plans, which provide a source of income to people who have
retired, represent money paid for past services. Private plans can be funded entirely by
the organization or jointly by the organization and the employee during the time of
employment. One popular form of pension plan is the defined-benefit plan. Under this,
the employer pledges to provide a benefit determined by a definite formula at the
employee’s retirement date. The other major type of retirement plan is the defined –
contribution plan, which calls for a fixed or known annual contribution instead of a
known benefit.

Paid Vacations
Typically, an employee must meet a certain length-of –service requirement before
becoming eligible for paid vacation. Also, the time allowed for paid vacations generally
depends on the employee’s length of service. Unlike holiday policies that usually affect
everyone in the same manner, vacation policies may differ among categories of
employees. Most organizations allow employees to take vacation by the day or week
but not in units of less than a day. Organizations may offer a wide range of additional
benefits, including food services, exercise facilities, health and first-aid services,
financial and legal advice, and purchase discounts in addition to the major benefits
previously discussed to motivate employees.

Some other compensions are like, Vehicle maintenance allowance, Fuel allowance,
Free medical insurance, Over time allowance, Regularity of Promotion, Long service
awards, Free training workshops, accommodation allowance and others.
Steps for creating a right compensation management
process

1. Budget allocated
Before fixing salaries for employees, it is necessary to understand the budget
allocated for that purpose. HR deferment needs to know how much money they are
allowed to spend on recruitment.

2. Need of dedicated HR professional


Compensation management is an ongoing process. Also, it needs highest level
of expertise to build attractive pay package for the employees within the allocated
budget. Big organizations have a department accountable for this purpose with a
management team comprising of personnel from finance, HR and marketing supervising
process. But, in start-up businesses, it is the owner who needs to look at the entire affair
for the time being.

3. Analyzing the responsibility attached with the job


While fixing compensation, it is necessary to analyze the job, the responsibility
attached with it, its expanded responsibilities, risk attached with the job and how the
competitors in the market are paying for the same kind of job.

4. Deciding on parameters for different compensation


packages
It is obvious that everybody is not going to get similar compensation package.
Deciding on different levels and parameters for different packages are necessary both
for better management and keeping talents in the organization. Employees would like to
see how their career will prosper in the organization.

5. Approving the packages


Once deciding the packages, it is necessary to get approval from the top
management and other departmental heads. Packages needs to be reasonable,
attractive and as per prevailing market standard.
A Multidiscipline Concept
Compensation has thus been studied selectively by those in separate disciplines:

Economists have focused on the price (wage) of a factor of production and abstracted
employee behavior into labor units employed (typically in terms of working hours).
Psychologists have focused on the needs of individuals and the means by which they
may be met by organizations, with less emphasis on the needs of the organization.
Sociologists, political scientists, and philosophers have not often studied
compensation per se, but concepts they have developed for other purposes may be
usefully applied to the study of pay. Management researchers and teachers have
focused on the more esoteric aspects of compensation; few have focused on the ability
to control costs.

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