Download - Compensation Business Law
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Compensation
AGBS,Mohali
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Compensation
"If you pick the right people andgive them the opportunity tospread their wings - and put
compensation and rewards as acarrier behind it - you almostdon't have to manage them."
-Jack Welch
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Compensation
Compensation is a systematicapproach to providing monetaryvalue to employees in exchange for
work performed. Compensation mayachieve several purposes assisting inrecruitment, job performance, and
job satisfaction.
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Compensation management
Compensation is what employeesreceive in exchange for theircontribution to the organisation.
Total compensation =
Direct + Indirect Compensation
Base Pay Incentives Benefits
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How is compensation used?
Compensation can be used for :-
1. Recruit and retain qualified employees.2. Increase or maintain morale/satisfaction.3. Reward and encourage peak performance.4. Achieve internal and external equity.5. Reduce turnover and encourage company
loyalty.
6. Modify (through negotiations) practices ofunions.
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What are the components of a
compensation system?
Job Descriptions A critical component ofboth compensation and selection systems,
job descriptions define in writing theresponsibilities, requirements, functions,
duties, location, environment, conditions,and other aspects of jobs. Descriptions maybe developed for jobs individually or forentire job families.
Job AnalysisThe process of analyzing jobs
from whichjob descriptionsare developed.Job analysis techniques include the use ofinterviews, questionnaires, and observation.
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What are the components of a compensation
system?
Job EvaluationA system for comparing jobs forthe purpose of determining appropriatecompensation levels for individual jobs or jobelements. There are four main techniques:Ranking, Classification, Factor Comparison, andPoint Method.
Pay Structures Useful for standardizingcompensation practices. Most pay structuresinclude several grades with each grade containinga minimum salary/wage and either stepincrements or grade range. Step increments are
common with union positions where the pay foreach job is pre-determined through collectivebargaining.
Salary SurveysCollections of salary and marketdata. May include average salaries, inflationindicators, cost of living indicators, salary budgetaverages.
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What are different types of
compensation? Different types of compensation include: Base Pay Commissions
Overtime Pay Bonuses, Profit Sharing, Merit Pay Stock Options Travel/Meal/Housing Allowance
Benefits including: dental, insurance,medical, vacation, leaves, retirement,taxes...
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Components of a Total
Compensation
Financial Direct
wages, salaries, commissions, bonuses
Indirect insurance plans
life, health, dental, disability
social assistance benefits retirement plans, social security, workers
comp
paid absences
vacations, holidays, sick leave
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Components of a Total
Compensation Program
Non-Financial
The Job
interesting, challenging, responsible
opportunity for recognition, advancement
feeling of achievement
Job Environment
policies, supervision, co-workers, statussymbols, working conditions, flextime,compressed work week, job sharing,telecommuting, flexible benefits programs
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Equity
The equity theory of motivation holdsthat workers assess their perceivedinputs to their work and their
outcomes to those of others
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Equity Theory
Internal equity Comparison of my input / reward ratio with
that of similar others.
Employees may seek to address imbalance bychanging their inputs.
Fairness of pay differentials between differentjobs in the organization can be established by
job ranking, job classification, point systemsand factor comparisons.
External equity
Fairness of organizational compensation levels
relative to similar jobs in other organizations.
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Monkeys Demand Equal PayA recent study shows brown capuchin monkeys
refused to play along when they saw another
monkey get a better payoff for performing the samework.
The monkeys were trained to trade a granite token fora piece of cumber. When the reward was the same
for both monkeys, they took the cucumber 95percent of the time.
But it was a different story when one monkey wasgiven something better -- namely, a grape. Then,
the other monkey often pitched a fit -- eitherthrowing the token, refusing to eat the cucumber orgiving it to the other monkey.
Associated Press 2003
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Individual Equity
Fairness about pay differentials among individualswho hold the same job can be established byusing:
Seniority-based pay systems that rewardlongevity.
Merit-based pay systems that rewardemployee performance.
Incentive plans that allow employees toreceive part of their compensation based ontheir job performance.
Skills-based pay systems.
Team-based pay plans that encouragecooperation and flexibility in employees.
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Types of Base Pay Systems
Job-based
Pay the job (not the person)
Market-based (external equity focus)
Point factor-based (internal equity focus) Skills / knowledge-based
Pay the person (not the job)
62% of F1000 firms used some type of skill
based pay in 1999
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Job Based Pay
Attraction Depends on marketpricing
Motivation No performance impact
SkillDevelopment
Learn job-related andupward mobility skills
Culture Bureaucratic,
hierarchicalStructure Hierarchical, individual
jobs and differentiationCost Good control of
individual pay
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Individual Skill/Knowledge Based Pay
Attraction Attracts learning-oriented individuals,high skills individuals
Motivation Little performance
impactSkillDevelopment
Motivates needed skilldevelopment
Culture Learning, self-managing
Structure Flat or team-based
Cost Higher individual pay
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Individual Merit
Attraction Good for high
performers
Motivation Good line of sight
SkillDevelopment
Learn skills that lead torewarded performance
Culture Performance oriented, jobfocused
Structure Individual and independentjobs
Cost Depends on the size of theawards
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Team Incentives
Attraction Good if team performs
well
Motivation Moderate line of sight
SkillDevelopment
Encourages team skills
Culture Team focused
Structure Team-based and integrated
Cost High if significant awardsgiven
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Organizational Plans
Attraction Good if organization
performs well
Motivation Weak line of sight
SkillDevelopment
Encourages broadunderstanding of business
Culture Business involvement
Structure Organization wide
integration
Cost Possible self-funding if basedon performanceimprovement
EMPLOYEE
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EMPLOYEE
COMPENSATION Compensation of employees (CE) is measured by the
value of the remuneration in cash or in kind which an
employee becomes entitled to receive from an
employer in respect of work done, during the
relevant accounting period - whether paid in advance,
simultaneously, or in arrears of the work itself.
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EXECUTIVE COMPENSATION
Executive Compensationis howtop executives of businesscorporations are paid. This
includes a basic salary,bonuses, shares, options andother company benefits.
It has become integral part
of management.
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The Importance of
Compensation
Impacts an employers ability to attract and retain
employees.
Ensure optimal levels of employee performance in meetingthe organizations strategic objectives.
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When to Use a Job-based Pay
Policy
A job-based pay work best in situations where:
Job duties are stable.
Skills are generic.
Employees move up through the ranks over time. Jobs are fairly standardized within the industry.
Drawbacks of a job-based pay system
Discounts individual ability.
Discourages lateral movement.
Tends to be bureaucratic, mechanistic, and inflexible.
Employees perceptions of equity are more important thanmarket or point data.
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Individual-based Compensation
Individual-based compensation works when:
The firm has a relatively educated workforce.
Employees often do different jobs Technology changes frequently.
Employee participation and teamwork areencouraged.
Opportunities for upward mobility are limited. Opportunities to learn new skills are present.
The costs of employee turnover andabsenteeism in terms of lost production are
high.
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Key Strategic Issues in Compensation
Determining compensation relative to themarket.
Striking a balance between fixed and variable
compensation. Deciding whether or not to utilize team-based
versus individual pay.
Creating the appropriate mix of financial and
non-financial compensation.
Developing a cost-effective compensationprogram that results in high performance.
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New Thinking for the New
Millennium
Strategic approaches to may compensation (pay) systemsmore responsive:
Pay the personfor individual worth (knowledge, skillsand competencies) rather than for the value of a jobthey perform.
Reward excellencethrough a pay for performancecompensation that establishes a clear relationshipbetween a significant amount of pay and attainment oforganizational objectives.
Individualize the pay systemto give employees choicesin how they are rewarded and what reward they receive.
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