Employee Compensation BBA HRM

Employee Compensation
BBA_HRM
Seema Singh, KUSOM 1

•What is compensation?
•What should be the basis of compensation?
•What are the main components of compensation?
•What are the four basic factors determining pay?
•How to establish pay rates?
•How compensation is aligned with other
components of PMS?
•How compensation is aligned with organization and
HR strategy?
What is compensation?
Total of all rewards provided to employees in
return for their labor

What can be the bases of compensation?

•Performance
•Seniority
•Membership
•Expertise/skill
•Task complexity
•Time spent

What are the main components of compensation?

•Direct financial payments: wages, salary, bonus,
commissions etc
•Indirect financial payments: all financial rewards
that are not included in direct compensation, e.g.,
insurance policy, health policies etc
•Non-financial payments: satisfaction that a person
receives from the job itself, e.g., meaningful tasks,
memberships, seniority
What are the four basic factors to be considered

while determining pay?
•Legal aspects
•Union
•Policy
•equity
(organization, labor market, job, employee –
these are to be considered)
Organization:
Policies
Orgn. Politics
Ability to pay
Employee:
PfP
Merit pay
Variable pay Labor market:
Job pricing Compensation surveys
Skill/competency-
(indiv. financial COLA
based pay
compensation) Labor unions
Seniority
Experience Society
Org membership Economy
Potential Job: Legislation
Pol. Influence JA
Luck JD
Job evaluation
Collective
bargaining
How compensation is aligned with other

components of PMS?
Performance planning, appraisal, monitoring,
development, corporate strategy- ?

Compensation
Financial Nonfinancial
Indirect:
Direct: Legally required The Job: Job environment:

Wages Social security Skill variety Sound policies
Salary Insurance Task identity Competent employees
Commission Family & Med. Task Congenial coworkers
Leave significance Appropriate status
Bonus
Autonomy symbols
Voluntary
Comfortable working
Vacations, leave Feedback
conditions
health benefits Workplace flexibility
Security benefits Flextime
Employee services Compressed workweek
premium pay Job sharing
Flexible compensation
Telecommuting
Compensation Laws (legal aspects):
•Stipulating what employers can or must pay in
terms of minimum wages, overtime pay, equal
pay, recordkeeping, and child labor provisions
•Exempt/nonexempt based on duties,
responsibilities, salary
•Equal pay act
•Civil rights act
•Other discrimination laws
Unions:
•Right to organize
•Collective bargaining
•Wage rate
•Income security
•Cost of living adjustments (COLA)
•Benefits
•Health care
•Time off with pay
Compensation policies:
Aligned reward strategy
• Pay leaders
• Market (going) rate
• Pay followers

Equity and its impact on pay rates:
Equity- perception of employees about fair
treatment
• External equity
• Internal equity

Labor market:
Ease of availability of required skills in the
market
JA and JD (to define):
• job contents, standards
• skills and competencies required
• work environment
• hazards associated

Other factors:
•Labor market:
Ease of availability of required skills in the market
•Ability to pay:
Financial strength of the organization- upper limit
•Compensation survey:
Lower limit
•Society:
Firm’s pricing of its goods or services
•The economy:
Recession, booming economy, cost of living

How to establish pay rates?
Five steps:
1.Conduct salary survey
2.Constitute committee to determine worth of job
3.Group jobs into pay grades
4.Price each pay grade
5.Develop rate ranges

1. Conduct salary survey
(what other comparable employers are paying for
comparable jobs)
• Formal or informal
• Pricing of benchmark jobs
• Data on other benefits

2. Constitute committee to determine worth of job (job
evaluation)
Purpose:
For formal and systematic comparison of jobs to determine
the worth of one job relative to another.
Procedure:
Compare the content of the jobs in relation to one another (in
terms of effort, responsibility, skills)
Compensable factors:
Approaches- intuitive approach or comparison of basic
common factors defining job content (as per equal pay act-
skills, effort, responsibility, working conditions)
Job evaluation methods:
Job ranking, job classification, point method etc

Group jobs into pay grades
Jobs of approximately equal difficulty or
importance as determined by job evaluation
• Point method- jobs falling within a range of
points
• Ranking method- jobs in two or three ranks
Classification method- jobs categorized into
classes or grades

4. Price each pay grade (wage curves)
• Assign average pay rates to each of the pay
grades/ individual jobs
(Fig 7.2)

5. Develop rate ranges
• Define rate ranges within each grade

Pricing managerial and professional jobs:
Job evaluation for these positions-
• partial exercise,
• doesn’t evaluate attributes like problem
solving, discretionary time, judgments,
working conditions

Study on managerial pricing:
Three factors-
• Job complexity-
span of control, number of divisions over which the
executive has direct responsibility, and management
level
• Ability to pay-
total profit and rate of return
• Executive’s human capital-
educational level, field of study, work experience

Three factors-
• Job complexity-
span of control, number of divisions over which the
executive has direct responsibility, and management
level
• Ability to pay-
total profit and rate of return
• Executive’s human capital-
educational level, field of study, work experience
(changing trend- financial performance the basis for
managerial salary, pay for performance)

• Cash focused culture- bonuses, dividends,
commission
• Rewarding certain behaviors with cash-
influences individual behavior and
performance

Pay package element (for managers, executives,
professionals):
• Base salary
• Short-term incentives
• Long-term incentives
• Executive benefits and perks

Strategy and executive pay:
• Identify the company’s strategic direction, and
translate this into specific business goals
• List the skills and competencies your professional
employees should have and the behaviors they
should exhibit to accomplish these goals
• Evaluate the extent to which the existing pay plan
produces these skills, competencies, and
behaviors (does it motivate employees to achieve
their goals?)
• Finally, design and implement the new pay plan
Current trends:
• Competency and skill based pay
• Broad-banding
• Board oversight of executive pay

Current trends:
Competency and skill based pay
pay the employee for the skills and knowledge he or
she is capable of using rather than for the
responsibilities of the job currently held.
Why?
to encourage the person to become more multi-skilled
How it benefits organization?
can have employees capable of handling multiple
projects (project teams), innovations, job rotation
Competencies- demonstrable personal characteristics such
as knowledge, skills, and behaviors
Current trends:
Competency and skill based pay
Five elements:
• Defining specific required skills
• Choosing a method for tying the person’s pay to
his or her skill competencies
• Develop a training system letting employees seek
and acquire skills
• Develop a formal competency testing mechanism
• Design the work in such a way that the
employees can easily move among jobs of
varying skill levels
Broad-banding
• Job slotting into classes or grades, each with its
own vertical pay rate range dictating his or her
minimum and maximum salary
How wide should the salary grades be in terms of
number of job evaluation points they include?
Broad bands- collapsing salary grades and ranges
into just a few wide ranges, or bands, each of
which contains a relatively wide range of jobs and
salary levels
(fig 7.3)

Board oversight of executive pay
Purpose-
To make executives personally liable, under certain
conditions, for corporate financial oversight lapses
Points to consider:
• Is our compensation committee being appropriately
advised?
• Do our procedures demonstrates diligence and
independence? (careful deliberations and records)
• Is our committee appropriately communicating its
decisions? How will shareholders react?

Compensating expatriate employees:
Issue:
Different COLA in different countries
Methods:
• Balance-sheet method
• Earnings of host country’s employees (host-
country rate or going rate approach)

Balance sheet method:
Aim: to make person’s compensation consistent with

what it would have been if he or she had stayed
home
• Base salary- as that of home country

• Housing costs
• Tax differences
• Other living expenses (eg, schools for children,
housing etc) Seema Singh, KUSOM 34
Positive side of balance-sheet method-
Makes it easier to repatriate employees (who
might object to having their salaries slashed
just because they are moving from high cost
country to low cost country)
Negative side of balance-sheet method-
Tension between manager and his or her host
country peers

Host-country based approach:
Advantage of integrating the expatriate better,
since he or she is earning what his or her host
country peers are earning.
Can reduce an employee’s salary, hardly a
practical option.

Incentive plans:
• Piecework plans
• Team or group incentive plans
• Incentives for managers and executives
• Incentives for sales people
• Non-tangible and recognition based awards
• Online award programs
• Merit pay as an incentive
• Profit-sharing plans
• Employee stock ownership plan
• Gain-sharing plans
• Earnings at risk pay plans
Incentive plans:
Piecework plans-
• Most common
• Payment against each unit produced by
individuals
Suitability?

Incentive plans:
Team or group incentive plans-
• To encourage teamwork
• All team members- same incentive based on
overall team performance
Drawback- each worker’s reward doesn’t
necessarily reflect his or her own efforts
• Different amounts for team members based
on individual efforts
Incentive plans:
Incentives for managers and executives-
Compensation for influencing divisional and
corporate profitability
Short term bonuses,
Long term incentives
Stock options

Incentive plans:
Incentives for sales people-
Combination of salary and commissions
Quota setting

Incentive plans:
Non-tangible and recognition based awards-
• Employee certificates
• Gift certificates
• Cash rewards
• Merchandise incentives
• Training programs
• Work/life benefits
• Individual travel
Incentive plans:
Online award programs-
• Use of websites to identify exceptional
employee service
• Saves time and effort on organization part

Incentive plans:
Merit pay (raise) as an incentive-
Aim- to differentiate between top and average
performer
• Salary increase awarded to employee based on
his or her individual performance
• Becomes part of base salary (not as bonus)
• Positive side- rewards directly tied to
performance motivates performance
• Negative side- people may perceive it unfair as it
relies on performance appraisal – which has
chances of appraiser’s biases
Incentive plans:
Profit-sharing plans-
• Employees receiving a share of the company’s
annual profits
• Supporting argument- profit sharing plans
boost productivity
• Opposing argument- not all employees put
equal effort

Incentive plans:
Employee stock ownership plan-
• Company-wide plans (contributing shares of
its own stock or cash to purchase those stocks
• Advantages- tax deduction for the company
• Ownership and commitment enhanced on
employee part
• Productivity increased

Incentive plans:
Gain-sharing plans-
Aim- to encourage improved employee
productivity by sharing resulting financial
gains with employees
Scanlon plan- five features- philosophy of
cooperation, identity, competence,
involvement system and sharing of benefits
formula
Incentive plans:
Gain-sharing plans-
Earnings-at-risk pay plans->
Employees agree to put a portion of their
normal pay (say, 6%) at risk if they don’t meet
their goals, in return for the possibility of
obtaining a much larger bonus (say 12%), if
they do exceed them. If the employees simply
meet their goals, they get their full salary
(100%)
HRIS and productivity:
Eases recording performance and calculating
incentives against their performance

Employee benefits:
Indirect monetary and non-monetary payments
to employees for continuing to work for the
company
Benefits account for around one-third of total
salary

Employee benefits:
Types:
• Pay for time not worked
• Unemployment insurance
• Vacations and holidays
• Sick leave
• Severance pay
• Insurance benefits
• Hospitalization, medical and disability insurance
• Long term care
• Retirement benefits
• Employee services and family-friendly/work life benefits
• Flexible benefits
Benefits and employee leasing:
(Human resource outsourcers)
Leasing firm- legal employer
(includes- recruiting, hiring, paying tax liabilities,
performance appraisal)
Saves time, effort, legal hassles
If not handled professionally- legal implications,
financial implications, impact on organization
performance

Employee Compensation BBA HRM

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Employee Compensation

Seema Singh, KUSOM 1

Seema Singh, KUSOM 3

What can be the bases of compensation?

Seema Singh, KUSOM 4

What are the main components of compensation?

What are the four basic factors to be considered

How compensation is aligned with other

Seema Singh, KUSOM 8

Direct: Legally required The Job: Job environment:

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Aim: to make person’s compensation consistent with

• Base salary- as that of home country

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