Compensation Management

Prof. K.B. Akhilesh

Dept. of Management Studies

Indian Institute of Science, Bangalore

Learning Objectives

• In this lecture, you should be able to learn and understand the

following:• Some meanings of money

• Elements of core compensation

• Internal equity

• Job evaluation

• Pay for performance

• Pay structure

• Wage policy

Some Meanings of Money (1 of 2)

• A reward for work well done

• A means to support oneself and one’s family

• A status symbol—the more you make, the more

status you have in the company and in society

• Payment for doing a job—never as much as is

deserved

• A paycheck and benefits such as paid vacation

and health insurance

Some Meanings of Money (2 of 2)

• Security

• A trap—the more you make, the more you

spend, so the more you need

• A symbol of professional achievement

• Payment for doing a job regardless of how well

the job was done

• A means of classifying people (as low-income,

middle-income, or high income)

• A company’s obligation to employees

Elements of Core Compensation

• Base Pay

– Hourly pay

– Annual salary

• How Base Pay is Adjusted Over Time

– Cost-of-living adjustments

– Seniority pay

– Merit pay

– Incentive pay

– Pay-for-knowledge and skill-based pay

Elements of Fringe Compensation (1 of

3)

• Social Security

– Unemployment insurance

– Retirement insurance

– Benefits for dependents

– Disability benefits

– Medicare

• Workers’ Compensation

• Family and Medical Leave

Elements of Fringe Compensation (2 of

3)

• Discretionary Benefits

– Protection Programs• Income protection programs

• Health protection programs

– Pay for time-not-worked• Holidays

• Vacation

• Sick leave

• Personal leave

• Funeral leave

• Cleanup, preparation, travel time

Elements of Fringe Compensation (3 of

3)

• Discretionary Benefits (cont.)

– Services

• Employee assistance programs (EAPs)

• Family assistance programs

• Tuition reimbursement

• Transportation services

• Outplacement assistance

• Wellness programs

Laws That Influence Compensation

• Income Continuity, Safety, and Work Hours

– Minimum wage law

• Minimum wage

• Overtime provisions

• Child labor provisions

– Factories Act of 1948

• Contract Labor Act

Compensation

Key Issues

• Internal Equity

• External Competitiveness

• Pay for Performance

Internal Equity

• Job evaluation: A systematic

procedure for establishing pay

differentials among jobs within a single

organization

• Approaches:

– ranking

– classification

– factor comparison

– point method

Ranking methods

• Simple approach

• Refinements:

– alternation ranking

• ―Whole Job‖ approach

Point Methods

• Steps:

– Choose compensable factors

– Create factor scales

– Determine factor weights

– Calculate total JE points

• ―Part Job‖ method

Alternatives to Job Evaluation

• Broad Banding

• Skill-Based Pay

External Competitiveness

• Market surveys

• Sources:

– in house

– consulting firms

– government publications

– the Web

Market survey validity?

Who you ask

What you measure

Pay for Performance:

Individual Plans• Merit pay:

– raises based on performance evaluations

• Bonuses:

– one-time payment based on subjective or

objective criteria

• Piece rates:

– pay based on units produced

Pay for Performance:

Group Plans

• Team-based pay:

– when team meets objectives, employees are

rewarded

• Gainsharing:

– when costs are reduced, employees share

savings

• Profit-sharing:

– when profits go up, employees share profits

New Trend in Pay:

Stock Options

• How they work

• Motivation issues

• Who receives them

Compensation System Process

3 Determine what people do

3 Determine how much roles are worth

3 Develop/Administer base pay program

3 Appraise performance

3 Reward performance

Building Blocks of Direct Compensation

1. The Foundation:

A Compensation

Philosophy

2.The Basics: Elements

of Base Pay

Administration

3. The Glue: Pay for

Performance

Programs

4. The Future: Effective

Compensation

Management

Pay Structure

q The principal control device, consisting of

minimums, midpoints and maximums

q Used to guide managers in making salary

determination decisions

Pay Structure Example

Thousands

120

110

100

90

80

70

60

50

40

30

20

10

0

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

$$Salary

Pay Grades

Market Midpoint Line

Pay Grade Maximums

Target Hiring Salaries

Pay Grade Minimums

Features

• Freedom to Act 94

• Planning 20

• Policies and Procedures 49

• Problem Solving 124

• Diversity of Knowledge 59

• Skill 43

• Licenses n/a

Total: 405

Designing Pay-for-Knowledge Programs

• Establishing Skill Blocks

– Skill type

– Number of skills

– Grouping of skills

• Transition Matters

– Skills assessment

– Aligning pay with the knowledge structure

– Access to training

• Training and Certification

– In-house or outsourcing training

– Certification and recertification

Broadbanding Structure and Its Relationship to Traditional Pay Grades and

Ranges

An

nu

al S

ala

ry

Band A Band B

Low HighJob Worth

Grade A

Grade B

Grade C

Grade D

Grade E

Employee Stock Terminology

• Stock option. A right granted by a company to an

employee to purchase a number of stocks at a

designated price within a specified period of time.

• Stock grant. A company’s offering of stock to an

employee.

• Exercise of stock grant. An employee’s purchase of

stock using stock options.

• Disposition. Sale of stock by the stockholder.

• Fair market value. The average value between the

highest and lowest reported sales price of a stock.

Common Executive Perks

• Company cars

• Financial services

• Legal services (for example, income tax preparation)

• Recreational facilities (for example, country club and

athletic club memberships)

• Travel perks (for example, first-class airfare)

• Residential security

• Tickets to sporting events

Corporate Performance Measures (1 of 3)

• Size

– Sales

– Assets

– Profits

– Market value

– Number of employees

• Growth

– Sales

– Assets

– Profits

– Market value

– Number of employees

Corporate Performance Measures (2 of 3)

• Profitability

– Profit margin

– Return on assets (ROA)

– Return on equity (ROE)

• Capital Markets

– Dividend yield

– Total return to shareholders

– Price/earning ratio

– Payout

Corporate Performance Measures (3 of 3)

• Liquidity

– Current ratio

– Quick ratio

– Working capital from operations

– Cash flow from operations

• Leverage

– Debt-to-equity ratio

– Short-term vs. long-term debt

– Cash flow vs. interest payments

Discretionary Income Expenditures

• Pension contributions

• Savings and investment

• Insurance payments

• Equity portion of mortgage payments

• Alimony payments

• Child support

• Student loan payments

• Car payments

Cash and Non cash Income Exclusions:

• Cash

– Salaries and wages

– Bonuses

– Sales commissions

– Incentives

– Professional fees

• Non cash

– Housing

– Meals

– Cars

– Allowances for cost of living differentials, education, home leave, tax reimbursements, children’s education, and moving expenses

In the next lecture….

• Please keep Bare Acts of

• ID Act of 1947

• Trade unions Act of 1926

• Industrial and employment standing orders

Act