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COMPENSATION SYSTEM. What is Compensation?. Employee compensation is the process of paying and rewarding people for the contributions they make to an organization. Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work.
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What is Compensation? • Employee compensation is the process of paying and rewarding people for the contributions they make to an organization. • Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work. • Compensation represents the total package of rewards—both monetary and nonmonetary.
Total Compensation Direct Indirect • Time Not Worked • Leave • Holidays • Vacations Wages / Salaries Commissions • Insurance Plans • Medical • Dental • Life Bonuses Gain sharing, etc. • Security Plans • Pensions • Employee Services • Educational assistance • Recreational programs
Pay Policy Model Policies Techniques Objectives Internal Alignment Internal Equity Job Description Job Evaluation Internal Structure Job Analysis Efficiency Fairness Compliance Competitiveness Pay Structure External Equity Market Definition Market Survey Policy Decision Contribution Employee Contribution Performance Appraisal Incentive Guidelines Incentive Scheme
Linking Compensation to Organizational Objectives • Value-added Compensation • Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. • “How does this compensation practice benefit the organization?” • “Does the benefit offset the administrative cost?”
Common Strategic Compensation Goals • To reward employees’ past performance • To remain competitive in the labor market • To maintain salary equity among employees • To mesh employees’ future performance with organizational goals • To control the compensation budget • To attract new employees • To reduce unnecessary turnover
The Compensation Package • The compensation package represents the blend of rewards employees receive from the organization. • Money paid as wages or salary is the largest component of most compensation packages. • Benefits and short and long term rewards make up the rest of the package.
Common Elements of Compensation Packages • The main elements of the Compensation Package consist of: • Base pay is a form of compensation that is not at risk and may consist of an hourly wage or an annual salary. • Employee benefits, are rewards other than monetary salary and wages.
Elements of the Compensation Package • Individual incentive is a reward that is based on the personal performance of the employee. Individual incentives are linked to performance behaviors and outcomes. • A group incentive is a reward based on the collective performance of a team or organization.
HOW DO STRATEGIC DECISIONS INFLUENCE A COMPENSATION PACKAGE? • The organization must decide how much compensation to allocate to base pay, benefits, individual incentives, and group incentives in order to align pay to the organization’s broad HR strategy.
HOW IS COMPENSATION LEVEL DETERMINED? • It all begins with the pay survey. • The pay survey provides information about how much other organizations are paying employees. • Pay surveys are conducted by consulting firms, which obtain confidential pay information from numerous organizations and create reports that describe average pay levels in other organization. • This information is grouped by industry, number of employees, sales volume and/or operating budget. • This makes it easier to determine if the companies pay practice gives it a competitive advantage.
Pay-Level Strategies • There are three market strategies • meet-the-market which establishes pay that is in the middle of the pay range for the selected group of organizations. • lag-the-market where an organization establishes a pay level that is lower than the average in the comparison group. • lead-the-market where the average pay level is higher than the average in the comparison group.
HOW IS COMPENSATION STRUCTURE DETERMINED? • The pay structure focuses on how compensation differs for people working in the same organization. • Job-based pay—focuses on evaluating different tasks and duties associated with various jobs in the organization. • Skill-based pay focuses on the difference in skill and ability required to perform the job.
Executive Compensation: Ethics and Accountability • Incentive payments are excessive compared with return to stockholders. • Time periods for judging and rewarding performance are too short. • Quarterly earnings growth is emphasized at the expense of research and development. • Emphasis is placed upon equaling or exceeding executive salary survey averages. • Benefits do not relate closely to individual performance.
The “Sweetness” of Executive Perks • Company car • Company plane • Executive eating facilities • Financial consulting • Company-paid parking • Personal liability insurance • Estate planning • First-class air travel • Home computers • Chauffeur service • Children’s education • Spouse travel • Physical exams • Mobile phones • Large insurance policies • Income tax preparation • Country club membership • Luncheon club membership • Personal home repairs • Loans • Legal counseling • Vacation cabins
