Module 1: (6 Hours)

Definition of Compensation: Basic concepts of Compensation (wages, salary, benefits, DA,

consolidated pay, Equity based programs, commission, reward, remuneration, bonus etc.,), Types
of Compensation Management - The Pay Model, Strategic Pay Policies, Strategic Perspectives of
Pay, Strategic Pay Decisions, Best Practices vs. Best Fit Options

DEFINITIONS:

Compensation refers to all forms of financial returns and tangible services and benefits
employees receive as part of an employment relationship.
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. It is a tool used by management for a variety of purposes to
further the existence of the company.
Compensation is the total amount of the monetary and non-monetary pay provided to an
employee by an employer in return for work performed as required.
Compensation is an integral part of human resource management which helps in motivating
the employees and improving organizational effectiveness.
Compensation Management is designing and implementing total compensation package
with a systematic approach to providing value to employees in exchange for work
performance.

Basic concepts of Compensation (Wages, salary, benefits, DA, consolidated pay, Equity
based programs, commission, reward, remuneration, bonus etc.),

Beach has defined wage and salary administration as follows:

"Wage and salary administration refers to the establishment and implementation of sound policies
and practices of employee compensation. It includes such areas as job evaluation, surveys of
wages and salaries, analysis of relevant organizational problems, development and maintenance
of wage structure, establishing rules for administering wages. Wage payments, incentives, profit
sharing, wage changes and adjustments, supplementary payments, control of compensation costs
and other related items"

Wage and Salary:

Wage and salary are the most important component of compensation and these are essential
irrespective of the type of organization. Wage is referred to as remuneration to workers
particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar employees
including managerial personnel. Wages and salary are paid on the basis of fixed period of time and
normally not associated with productivity of an employee at a particular time.
WAGES:
According to economic theory, wages are defined broadly as any economic compensation paid by
the employer to his laborers under some contract for the services rendered by them. In its actual
sense which is prevalent in the practice, wages are paid to workers which include basic wages and
other allowances which are linked with the wages like dearness allowances, etc.

Minimum Wage:
A minimum wage is one which has to be paid by an employer to his workers irrespective of his
ability to pay. According to the above committee,

"Minimum wage is the wage which must provide not only for the bare sustenance of life, but for
the preservation of the efficiency of the workers. For this purpose, minimum wage must provide
some measure of education, medical requirements and amenities. "

Subsequent to the committee's report, Government enacted legal provisions regarding minimum
wages under the Minimum Wages Act. 1948.

Living Wage:
Along with the minimum wage the Committee on Fair Wages has given the concept of living wage
which has been defined as follows:

"A living wage is one which should enable the earner to provide for himself and his family not only
the bare essentials of food, clothing and shelter but a measure of frugal comfort including
education for his children, protection against ill-health, requirements of essential social needs and
a measure of insurance against the more important misfortunes including old age. "

Living wage is more than the concept of minimum wage. Such a wage is determined keeping in
view the national income and paying capacity of industrial sector

Fair Wage:
The concept of fair wage is linked with the capacity of the industry to pay. The Committee has
defined fair wage as follows:

"Fair wage is the wage which is above the minimum wage but below the living wage. The lower
limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity
of the industry to pay. "

Thus, fair wage depends on different variables affecting wage determination. Such factors are
labour productivity, prevailing wage rates, the level of national income and its distribution and the
capacity of industry to pay. At present, the concept of fair wages is followed by the most business
organizations.

SALARY COMPONENTS: BENEFITS: ALLOWANCES

Allowances often grow out of whatever is in short supply. It is a cushion for inflation and it is
statutory to meet extra burden to justify real wage.
Allowances. Several allowances are paid in addition to basic pay. Some of these allowance are
given below:
Dearness Allowance. This allowance is given to protect real income against inflation. Generally,
dearness allowance (DA) is paid as a percentage of basic pay.
House Rent Allowance. Employers who do not provide living accommodation pay house
rent allowance (HRA) to employees. This allowance is calculated as mentioned below.
o HRA - 50% of basic in metro and 40% non-metro - Taxable, subject to minimum of
kfollowing
1) Actual rent paid.
2) Rent paid in excess of 10% of Salary.
3) 50% of basic in metro & 40% non-metro.

City Compensatory Allowance. This allowance is paid generally to employees in metros

and other big cities where cost of living is comparatively high. City compensatory
allowance (CCA) is generally a fixed amount per month.
Transport Allowance/Conveyance Allowance. Some employers pay transport allowance
(TA) to their employees. A fixed sum is paid every month to cover a part of travelling
charges. In some cases, medical allowance, education allowance for children, tiffin
allowance, etc. are also paid.

INCENTIVES:
‘Incentive’ may be defined as any reward of benefit given to the employee over and above his
wage or salary with a view to motivating him to excel in his work. Incentives include both
monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate individual
or group performance. The following are some of the definitions of the term ‘Incentive’:
- “Wage incentives are extra financial motivation. They are designed to stimulate human effort by
rewarding the person, over and above the time rated remuneration, for improvements in the present
or targeted results” – The National Commission on Labour.

FRINGE BENEFITS

The fringe benefits are categorized as follows:

- Payment for time not worked: Benefits under this category include - sick leave with pay, vacation
pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time, etc.
- Extra pay for time worked: This category covers the benefits such as - premium pay, incentive
bonus, shift premium, old age insurance, profit sharing, unemployment compensation, Christmas
bonus, Deewali or Pooja bonus, food cost subsidy, housing subsidy, recreation.

Organizations provide a variety of fringe benefits. The fringe benefits are classified under four
heads as given here under:
Employment Security:
Benefits under this head include unemployment insurance, technological adjustment pay, leave
travel pay, overtime pay, leave for negotiation, leave for maternity, leave for grievances, holidays,
cost of living bonus, call-back pay, retiring rooms, jobs to the sons/daughters of the employees
and the like.

Health Protection:
Benefits under this head include accident insurance, disability insurance, health insurance,
hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

Old Age and Retirement:

Benefits under this category include: deferred income plans, pension, gratuity, provident fund, old
age assistance, old age counselling, medical benefits for retired employees, travelling concession
to retired employees, jobs to sons/daughters of the deceased employee and the like.

Personnel Identification, Participation and Stimulation:

This category covers the following benefits: anniversary awards, attendance bonus, canteen,
cooperative credit societies, educational facilities, beauty parlour services, housing, income tax
aid, counselling, quality bonus, recreational programs, stress counselling, safety measures etc.

Employee Security:
Physical and job security to the employee should also be provided with a view to promoting
security to the employee and his family members. The benefit of confirmation of the employee on
the job creates a sense of job security. Further a minimum and continuous wage or salary gives a
sense of security to the life.

Retrenchment Compensation:
The Industrial Disputes Act, 1947 provides for the payment of compensation in case of lay-off and
retrenchment. The non-seasonal industrial establishments employing 50 or more workers have to
give one month’s notice or one month’s wages to all the workers who are retrenched after one
year’s continuous service. The compensation is paid at the rate of days wage for every completed
year of service with a maximum of 45 days wage in a year. Workers are eligible for compensation
as stated above even in case of closing down of undertakings.

Lay-off Compensation:
In case of lay-ofkf, employees are entitled to lay-off compensation at the rate of 50% of the total of
the basic wage and dearness allowance for the period of their lay-off except for weekly holidays.
Lay-off compensation can normally be paid up to 45 days in a year.

Safety and Health:

Employee’s safety and health should be taken care of in order to protect the employee against
accidents, unhealthy working conditions and to protect worker’s capacity. In India, the Factories
Act, 1948, stipulated certain requirements regarding working conditions with a view to provide
safe working environment. These provisions relate to cleanliness, disposal of waste and effluents,
ventilation and temperature, dust and fume, artificial humidification, over-crowding, lighting,
drinking water, latrine urinals, and spittoons.
Equity Compensation
It is a non-cash pay that represents ownership in the firm. This type of compensation can take many
forms, including options, restricted stock and performance shares. Equity compensation allows the
employees of the firm to share in the profits via appreciation and can encourage employee to stay
with the company, particularly if there are vesting requirements.

Equity compensation has been used by many public companies and some private companies,
especially startup companies. Recently launched firms may lack the cash or want to invest cash
flow into growth initiatives, making equity compensation an option to attract high quality
employees. Traditionally, tech companies in both the start-up phase and more mature companies
have used equity compensation to reward employees.

a. Common Types of Equity Compensation

Companies that offer equity compensation can give employees stock options that offer the
right to purchase shares of the companies' stocks at a predetermined price, also referred to
as exercise price. This right may vest with time, allowing employees to gain control of this
option after working for the company for a certain period of time. When the option vests,
they gain the right to sell or transfer the option. This method encourages employees to stick
with the company for a long term. However, the option typically has an expiration.

b. ESOP (Employee Stock ownership plan): A plan in which a company borrows money
from a financial institution by using its stock as collateral for the loan. Principal and interest
loan repayments are tax-deductible. With each loan repayment, the lending institution
releases a certain amount of stock being held as security. The stock is then placed into an
employee stock ownership trust (ESOT) for distribution at no cost to all employees. The
employee receives the stock upon retirement or separation from the company.

c. Direct Equity

This form of award or reward involves the actual issuance of stock (or membership
interests in the case of an LLC) to a participant. Usually, the grant is structured as a sale
and the securities vest over time to assure continued service or employment. In some cases,
the participant signs a promissory note to pay for the securities and the note is amortized
through bonus payments over the life of the note. In other cases, the note is forgiven over
time depending upon performance.

CONSOLIDATED SALARY

It means the amount that employee get without any perks or allowances it is the fixed salary
irrespective of target achieved or performance criteria etc. It means employee will surely get Rs.
000/- and rest above depends on your work. Consolidated means all inclusive. Normally
consolidated pay means, salary paid to persons on probation, contractual assignment etc., - but the
payment will be considered for all statutory benefits.
COMMISSSION

Many sales positions offer a commission on the sales made by an employee, or a percentage of the
amount sold. Some of these commissioned positions offer a base salary, whereas others are solely
dependent on commission.

Sales commissions is paid for a sales employees (inside or outside), commissions are generally a
good portion of employee’s pay. These are often referred to as bonuses as well, but they differ
from other bonuses in that they are directly tied to your sales numbers and generally not to anything
else. Some companies cap the total sales bonus an individual employee can receive.

A structure of bonus payments is frequently found in sales organizations to reward sales

performance at specified levels over and above commission. Some sales organizations reward
employees with bonus pay without commission.

Other organizations set team sales goals instead of individual sales goals. As a team member, you'd
earn what the other team members make, a portion of the pooled commissions and bonus, if
available.

REWARD
A reward is an appetitive stimulus given to a human to alter its behavior. Rewards typically serve
as reinforces. A reinforce is something that, when presented after a behavior, causes the probability
of that behavior's occurrence to increase. Note that, just because something is labelled as a reward,
it does not necessarily imply that it is a reinforcer. A reward can be defined as reinforcer only if its
delivery increases the probability of a behavior.

Reward or reinforcement is an objective way to describe the positive value that an individual
ascribes to an object, behavioral act or an internal physical state. Primary rewards include those
that are necessary for the survival of species, such as food, sexual contact, or successful aggression.
Secondary rewards derive their value from primary rewards. Money is a good example. They can
be produced experimentally by pairing a neutral stimulus with a known reward.

REMUNERATION

It is a reward for employment in the form of pay, salary, or wage, including allowances, benefits
(such as company car, medical plan, and pension plan), bonuses, cash incentives, and monetary
value of the noncash incentives.

Remuneration is payment or compensation received for services or employment. This includes the
base salary and any bonuses or other economic benefits that an employee or executive receives
during employment.
Remuneration often refers to the total compensation received by an executive, which includes not
only the person's base salary but options, bonuses, expense accounts and other forms of
compensation. The amount of remuneration and the form it takes is dependent on many factors,
including the employee's value to the company (full-time versus part-time; executive position
versus entry-level), the job type (salaried versus hourly pay; commission versus base pay; tipped
positions) and the company's business model (some companies offer bonuses or employee stock
options while others do not). One company might try to hire a desirable employee of another
company by offering them better remuneration. In the cases of executives, this corporate "wooing"
is known as a golden hello.

Deferred compensation
Another type of remuneration is deferred compensation, which sets asides an employee's earnings
to be redeemed at a later date. One common example of this is a retirement plan. To understand
the reasons why it might be a good idea to enroll in such a program, see: Benefits of Deferred
Compensation Plans.

BONUS
Bonus means an extra payment (bonus payment) received for doing one's job well or a salary or
wages based completely on how well one does one's job, called performance-related pay or pay
for performance.
Bonus pay is compensation over and above the amount of pay specified as a base salary or
hourly rate of pay. The base amount of compensation is specified in the employee appointment
letter, in the employee personnel file, or in a contract.
Employers can distribute bonus pay randomly as the company can afford to pay a bonus, or the
amount of the bonus pay can be specified by contract.

Types of Bonuses includes, contracted bonus pay where senior executives may have contracts
that require the company to pay out bonuses. These bonuses are often dependent on the company
meeting specific revenue targets, or the employer may base them on different criteria.

The other type of bonus is performance bonuses that companies offer bonuses to people below
the executive level as well, although this practice is rare. These bonuses are based on many
different factors, but many companies base them on three things.

Personal performance. Employees are rated based on how they met, didn't meet, or exceeded the
goals set by their management.
Company goals. While an employee may have had an outstanding year herself, if the company didn't
meet its financial goals, the employee won't become eligible for a bonus. On the other side, if the
company exceeds its financial goals, it's possible that the employees will receive a higher bonus.
Pay grade. Typically, if you're paid more money, you're eligible for a higher bonus. For example,
if you earn ` 5, 00,000/- a year and meet your goals and the company meets its goals, you
 Become eligible for a 5% bonus, but if you earn ` 10, 00,000/- a year under the same conditions,
you could be eligible for a 10% bonus.

A PAY MODEL
The pay model shown in below mentioned figure serves as a framework for examining current pay
systems.

It contains three basic building blocks:

1. The strategic compensation objectives,
2. The strategic policies that form the foundation of the compensation
3. The techniques of compensation.

1. Strategic Compensation Objectives

Strategic objectives are goals identified by an organization as necessary for the achievement of
its strategy for successful pay systems, they are designed and managed to achieve certain strategic
objectives. The basic objectives, shown at the right side of the model, include efficiency, fairness,
and compliance with laws and regulations. Objectives serve several purposes. First, they guide the
design of the pay system. Consider the employer whose objective is to reward outstanding
performance. That objective will determine the pay policy (e.g., pay for performance) as well as
the elements of pay plans (e g., merit and/or incentives).

Another employer’s objectives may be to develop a flexible, continuously learning workforce

through job design, training, and team-building techniques. A pay system that is aligned with this
employer’s objectives may have a policy of paying salaries that at least equal those of competitors
and that go up with increased skills or knowledge.

The efficiency objective can be stated more specifically:

1. Improving performance, quality, delighting customers and stockholders.
2. Controlling labor costs.

Fairness is a fundamental objective of pay systems.

Thus, the fairness objective attempts to ensure fair treatment for all employees by recognizing
both employee contributions (e.g., higher pay for greater performance, experience, or training)
and employee needs (e.g., a fair wage as well as fair procedures).
 Procedural fairness is concerned with the processes used to make decisions about pay. It
suggests that the way a pay decision is made may be as important to employees as the results of
the decision.

Compliance as a pay objective involves conforming to various central, provincial, and territorial
compensation laws and regulations. As these laws and regulations change, pay systems may need
to be adjusted to ensure continued compliance.

Objectives also serve as the standards for judging the success of the pay system. If the objective
is to attract and retain the best and the brightest, yet skilled employees are leaving to take higher
paying jobs with other employers, the system may not be performing effectively.

2. Four Strategic Policies

Every employer must address the strategic policy decisions shown on the left side of the pay model:
a. Internal alignment,
b. External competitiveness,
c. Employee contributions, and
d. Administration of the pay system.
These policies form the foundation on which pay systems are built.

a. Internal Alignment: Internal alignment refers to comparisons between jobs or skill levels
inside a single organization it include work analysis. Jobs and people’s skills are compared in
terms of their relative contributions to the organization’s objectives. While aligning Job
descriptions of each job decides the amount of pay.

How, for example, does the work of the programmer compare with the work of the systems
analyst, the software engineer, and the software architect? Does one contribute to providing
solutions to customers and satisfying shareholders more than another? These questions
emphasize evaluation/certification criteria for performance.

Determining what is an appropriate difference in pay for people performing different work is one
of the key challenges facing managers.

Internal alignment policies influence all three compensation objectives. Pay relationships
within the organization have an effect on employee decisions to stay with the organization, to
become more flexible by spending in additional training, or to seek greater responsibility.

b. External Competitiveness: It includes market definitions, surveys and policy lines. It is a

comparison of compensation with that of its competitors it refers to compensation relationships
external to the organization; i.e., comparison with competitors. Market definitions will tell how
should an employer position its pay relative to what competitors? Surveys will tell how much
do we wish to pay Design managers in comparison to what other employers would pay them?
What mix of pay forms—base, incentives, stock, benefits—will help achieve the compensation
objectives? Employers have several policy options.

Increasingly, organizations claim their pay systems are market driven, i.e., based almost
exclusively on what competitors pay. It determines what mix of pay forms a company uses is
also part of its external competitive policy.
External competitiveness decision ensures that the pay is sufficient to attract and retain
employees. It also helps to control labor costs so that the organization’s prices of products or
services can remain competitive.

c. Employee Contributions: Pay for contribution depends on Seniority, performance and merit
based. The relative emphasis placed on performance. Should one programmer be paid
differently from another if one has better performance and/or greater seniority? Or should all
employees share in the organization’s financial success (or failure) via incentives based on
profit? Perhaps more productive teams of employees should be paid more than less productive
teams. The degree of emphasis to be placed on performance is an important policy decision,
since it directly affects employees’ attitudes and work behaviors.
d. Administration: Policy regarding administration of the pay system is the last building block in
pay model. The system will not achieve its objectives unless it is managed properly. The greatest
system design in the world is useless without competent management. Managers choose what
forms of pay to include and how to position pay against competitors. They must communicate
with employees and judge whether the system is achieving its objectives.

Managers must ask, Are we able to attract skilled workers? Can we keep them? Do our
employees feel our system is fair? Do employees understand how their pay is determined?
Asking questions like how do the better-performing firms, with better financial returns and a
larger share of the market, pay their employees?

Pay Techniques
Techniques tie the four basic policies to the pay objectives.

Internal alignment typically is established through a sequence that starts with analysis of the work
done and the people needed to do it. Information about the person and/or the job is collected,
organized, and evaluated. Based on these evaluations, a structure of the work is designed. This
structure depicts relationships among jobs and skills or competencies inside an organization. It is
based on the relative importance of the work in achieving the organization’s objectives. The goal
is to establish a structure that is aligned with and supports the organization’s objectives.

External competitiveness is established by setting the organization’s pay level in comparison with
how much competitors pay for similar work and what pay forms they use. The total compensation
is determined by defining the relevant labor markets in which the employer competes, conducting
surveys to find out how and what other employers pay, and using that information in conjunction
with the organization’s policy decisions to generate a pay structure.

The relative emphasis on employee contributions is established through performance and/or

seniority-based increases, incentive plans, and stock options and other performance-based
approaches. Increasingly

STRATEGIC PAY POLICIES, STRATEGIC PERSPECTIVES OF PAY, STRATEGIC PAY

DECISIONS
STRATEGIC PAY POLICIES
Strategy: The Totality of Decisions: Compensation strategy is a challenging part let us study
the strategies of Google, Medtronic and Merrill Lynch.
Similarities and Differences in Strategies
These are three companies that are operating in very different businesses facing different
conditions, different customers, and different talent. So different in their pay strategies is not
surprising. Strategies also differ in companies competing for the same talent.

Different strategies within the same industry

From the above illustration the variance in strategic perspective among companies in different
industries (Google, Medtronic, and Merrill Lynch) and even among companies in the same
industries (Google and SAS).“Let the market decide our compensation” philosophy is untenable
in the real world, especially in global environments

Strategic Choices
Strategy refers to the fundamental directions that an organization chooses. An organization
defines its strategy through the tradeoffs it makes in choosing what (and what not) to do.
It involves asking questions at following levels.
 Corporate level: “What business should we be in?”
  Business unit level: “How to gain and sustain competitive advantage?”
 Functional level: “How should total compensation help gain and sustain competitive
advantage?”
STRATEGIC PERSPECTIVE
A strategic perspective focuses on those compensation choices that help the organization gain
and sustain competitive advantage.

Strategic Choices

Support Business Strategy

Every book and consultant emphasize on pay systems to align with the organization's business
strategy based.

Compensation systems can be tailored to three general business strategies:

 Innovator business strategy stresses new products and short response time.
 Cost cutter business strategy by minimizing costs, encouraging productivity increases.
 Customer-focused business strategy

When business strategies change, pay systems should also change.

Tailor the Compensation System to the Strategy
Figure 4: IBM’s Strategic
A redesigned IBM no longer cells the PCs that they popularized. Instead, they concentrate on
advanced information technology, including hardware, software, services and research.
A new business strategy requires a new compensation strategy. At IBM, this involves streamlining
organisation by cutting layers of management, redesigning jobs to build in more flexibility,
increasing incentive pay to strongly differentiate on performance and reducing constantly the costs.

STRATEGIC PAY DECISIONS

Principles and Priorities
Five Strategic Guidelines for Compensation Choices: using the pay model, let us consider the
five strategic compensation choices faced by managers at Whole Foods (Whole Foods Market,
Inc. is an American foods supermarket chain specializing in organic food that first opened on
September 20, 1980.)
a. Objectives
b. Internal Alignment
c. External Competitiveness
d. Employee Contributions
e. Management

The Pay Model Guides Strategic Pay Decisions

Decisions based on the five strategic compensation choices of the pay model, taken together,
form a pattern that becomes an organization's compensation strategy.
Stated versus Unstated Strategies
Example: The Strategic Compensation Decisions Facing Whole Foods
a. Objectives: How should compensation support business strategy and be adaptive to the
cultural and regulatory global environment?
Whole Foods’ Objectives
 Increase shareholder value through profits and growth.
 Go to extraordinary lengths to satisfy and delight customers.
 Seek and engage employees who are going to help the company make money.
b. Internal Alignment: How differently should the various types and levels of skills and work be
paid within the organization?
Whole Foods’ Approach
 Store operations are organized around eight to ten self-managed teams
 Egalitarian, shared-fate philosophy – executive salaries do not exceed 14 times the
average pay of full-time employees
 All full-time employees qualify for stock options, and 94 percent of the company's
options go to non-executive employees
c. External competitiveness: How should total compensation be positioned against our
competitors? What forms of compensation should we use?

Whole Foods’ Approach

 Offer a unique deal compared to competitors
 Provide health insurance for all full-time employees.
 20 hours of paid time a year to do volunteer work.
Example: The Strategic Compensation Decisions Facing Whole Foods (cont.)
d. Employee contributions: Should pay increases be based on individual and/or team performance,
on experience and/or continuous learning, on improved skills, on changes in cost of living, on
personal needs, and/or on each business unit’s performance?
Whole Foods’ Approach
 A shared fate – every four weeks, assess the performance of each team
 Top teams get an extra $1.50 to $2.00 an hour in the next pay period
Example: The Strategic Compensation Decisions Facing Whole Foods (cont.)
e. Management: How open and transparent should pay decisions be to all employees? Who
should be involved in designing and managing the system?
Whole Foods’ Approach
 “No-secrets” management; every store has a book listing the previous year's pay for
every employee including executives.
 “You decide” – employees recently voted to pick their health insurance rather than
having one imposed by leadership.

DEVELOPING A TOTAL COMPENSATION STRATEGY: FOUR STEPS

These steps are appears to be simple, executing them is really complex. Trial and error, and
insight play major roles.
Step 1: Assess Total Compensation Implications: Let us take a any organization’s past, present
and most importantly future. What factor in business environment contributes to the success?
Which factors are going to become important in future? We will discuss these following factors.
Competitive Dynamics – Understand the Business
This involves understanding of the specific industry in which company is operating. To deal with
turbulent competitive dynamics focusing on the following factors is essential.
 Changing customer needs
 Competitors’ actions
 Changing labor market conditions
 Changing Laws
 Globalization
Competitive dynamics can be assessed globally and comparing pay among globally is complex.
In the following figure Toshiba’s Managerial compensation for its managers is given.
Toshiba’s Managerial Compensation Plan, Annual Amount (in Yen)

Culture/values: A pay system reflects the values that guide an employer's behavior and underlie
its treatment of employees. It always mirrors the company’s image and reputation. Companies
generally publish their value system in company website. Medtronic publishes this in 24 languages.
Social and political context
Context refers to legal and regulatory requirements, cultural differences, changing workforce,
demographics, expectations etc. These factors also affect compensation choices. To manage
diverse workforce Whole Foods brought diverse form of pay. Government is a major stakeholder
in determining compensation, hence lobbying is also part of compensation strategies

Employee preferences
All employees are not same and this difference is easily overlooked while formulating
compensation. Major challenge is how to better satisfy individual needs and preferences.
Offering more choices is one approach. Older worker may prefer option like pension and
retirement benefits and younger employees prefer housing loan, personal loans etc.

Choice – Examples: Flexible benefits and choices among health care plans and investment
funds for retirement are examples. On the other hand some people do not always choose well.
They fail to understand alternatives. In addition to possible confusing employees, unlimited
choice would be challenging to design and manage.

Union preferences
Pay strategies need to be adapted to the nature of the union-management relationship. Union
preferences for different forms of pay and their concern for job security affect pay strategy.
Unions' interests can differ
Compensation deals with unions can be costly to change

Prominence of pay in overall HR strategy: Supporting player or catalyst for change

Pay strategy is influenced by how it fits with other HR systems in the organisations, another of
the strategic decisions. If organisation is decentralized and emphasizes flexibility, then a
centralized and confidential pay system controlled by a few people in a corporate unit will not
work.
High-performance systems generally include three features.
1. High skill/knowledge requirements
2. Work designed so that employee teams enjoy discretion in making decisions and continue
to learn
3. Pay systems based on performance
Pay can be a supporting player or a catalyst for change

Step 2: Map a Total Compensation Strategy

Mapping is used in marketing to clarify and communicate a product's identity. Strategic map offers
picture of a company’s compensation strategy based on the five choices in the pay model
. It can also clarifies the message the company is trying to establish with its compensation
system.
Maps do not tell which strategy is the “best”, providing rather framework and guidance

Figure 8: Contrasting Maps Of Microsoft And SAS

Steps 3 and 4: Implement and Reassess

Step 3: This involves implementing strategy through the design and execution of compensation
system. The compensation system translates strategy into practice – and into people’s bank
accounts.
Step 4: Reassess and realign, closes the loop and recognizes that the strategy must be changing
to fit changing conditions. It involves periodic reassessment for continuous learning, adapting and
improving techniques.

Sources of Competitive Advantage: Three Tests

Three tests determine if a pay strategy is a source of advantage
 Is it aligned?
– Align with business strategy.
– Align externally with the economic and sociopolitical conditions.
– Align within overall HR system.
 Does it differentiate?
– How it really different from everyone else’s. If it is simple it easy to copy.
They are difficult to imitate.
 Does it add value?
– It is a largest controllable expense. Calculate the return on investment
(ROI). Many people find this approach as a dehumanizing. They argue that
viewing pay as an investment with measurable returns diminishes the
theory of fair treatment.
Best Practices” Versus “Best Fit”?
Best Fit Best Practices
If design of pay system Assumptions
Reflects company’s strategy and values A set of best-pay practices exists
Is responsive to employees’ and unions’ Practices can be applied universally across all
needs situations
Is globally competitive Results in better performance with almost any
Company is more likely to achieve competitive business strategy
advantage

Virtuous and Vicious Circles

One study concluded that how you pay also matters as much as how much you pay
Studies conclude that performance-based pay that shares success with employees improves
employee attitudes, behaviors, performance – especially when combined with high-performance
practices
Performance-based pay can be the best practice under right circumstances
Virtuous and Vicious Circles