Compensation & Benefits

Module 1 (Part II)

Total Rewards Fundamentals

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 Learning Outcomes
1. Characteristics of Compensation Programs.
2. Characteristics of Professionally Designed Compensation
Systems.
3. How Compensation Professionals Relate to various
stakeholders?
4. Pay Types.
5. What is meant by a Compensation Philosophy?

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Characteristics of Compensation
Programs

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Characteristics of Compensation Programs

Affordability

Internal Understand
Equity able

Comp. Programs

Safeguard Efficient to
Organizational
Resources Administer

Legal
Defensibility

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 Characteristics of Compensation Programs

The following “ideal” characteristics are necessary for every

Compensation Program:

• Internal Equity. A measure of how an organization values each of its

jobs in relation to one another.

• Affordability. A measure of how costly a compensation program is to a

company.

• Understandable/Saleable. To be accepted and understood,

compensation programs must be well communicated.

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 Characteristics of Compensation Programs

• Efficient to Administer. A balance needs to be struck between what

appears to be the “best” program and what is efficient, effective, and
easiest to administer.

• Legal Defensibility. Compensation programs must adhere to specific

laws designed to provide fairness in how employees are paid.

• Safeguard Organizational Resources. Rewards should reflect both

individual employee and company performance. HR should be seen as
an investment that should be protected, as well as optimized.
 Characteristics of Compensation Programs

• Flexible. flexible and capable of changing as needed without requiring

a redesign every time a new need arises.
Professionally Designed Compensation Systems
Must be

Internally
Consistent

Market Competitive

Linked to Individual
Contribution
1. Internally Consistent:
Internal consistency plays a major role in analysis of the compensation for
the employees in the organization. This involves:

– Job Analysis: Method of collecting, analyzing and listing information

for defining job. It involves contents of a job, needs of employees,
occasionally working situations.

– Job Evaluation: Mostly salaries differ from employee to employee

in an organization. Compensation professionals must analyze the
prioritized jobs which provides more value to the company in terms
of profits and goodwill. This is done by comparing the all jobs in the
organization.

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2. Market Competitive:
Market competitiveness involves retaining skilled personnel to the
organization. Compensation professional develop market competitive
compensation system by:

A. Conducting a Strategic Analysis to well-understand the Internal

factors and External Market Force when developing compensation
system

– Internal factors:
- Company Financial Status.
- Functional Abilities.
- Human Resource Capabilities.

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 External market force:
- Company profile
- Competition
- Long term prospects of the industry

B. Compensation surveys: They are important because they enable

compensation professionals to obtain realistic views of
competitors’ pay practices (salary & benefits practices).

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3. Linked to Individual Contribution:

• In any organization, salaries are not equally given to the employees. It

depends on their work, skill, educational qualification.

• Pay structures represent pay rate differences for jobs of unequal worth and
the framework for recognizing differences in employee contributions.

• Companies recognize these differences by paying individuals according to

their credentials, knowledge, or job performance.

• Well-designed structures should promote the retention of valued employees

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 Group Activity
Work in groups to decide on the steps you need to take as
a Comp & Ben Professional in order to professionally
design your company compensation packages

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How Compensation Professionals
relate to Various Stakeholders

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How compensation professionals
relate to various stakeholders
Line
Managers

Governm Employees
ent

C&B

Executive
Unions
s

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Pay Types

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 Pay Types

Adjustments to Core Compensation

Pay Types

COLA / Seniority Merit Incentive Pay for Pay for

Inflation
Rate Pay Pay Pay Knowledge Skill

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 Pay Types

Wages and Salary:

• Wages represent hourly rates of pay and salary refers to monthly rate
of pay irrespective of the number of hours worked.
• They are subject to annual increments.
• They differ from employee to employee and depend upon the nature
of jobs, seniority and merit.

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 Pay Types

Basic Salary
Base Pay
Variable
Fixed Salary
Basic Pay

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 Basic Pay Variable Pay
• The wage provided in the • Incentives - commissions -
employment contract of compensation for personal
and the addition of such efforts- cost of living
allowances excluded from allowances- social
the elements that are allowances - collective
considered a part of the grants - collective bonuses
variable wage or the daily – the individual share in
wage due. profits- - special
allowances not included in
the basic remuneration.

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 Pay Types

COLA Cost-of-Living Adjustments :

• Represent periodic base pay increases that are founded on changes
in prices as recorded by the consumer price index (CPI).

• The purpose of a cost-of-living increase is to protect the employees'

purchasing power against rising inflation. These increases are given
to all employees, either in equal cents per hour or as a percentage of
their current pay.

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 Pay Types

Inflation Rate:
• The rate at which the average price level of a basket of selected
goods and services in an economy increases over a period of time.
Often expressed as a percentage, inflation indicates a decrease in
the purchasing power of a nation’s currency.

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 Pay Types
Seniority Pay:

• Seniority Pay Systems reward employees with periodic additions to base

pay according to employees length of service in performing their jobs..

• Organizations may agree to one of these two rules when seniority is

used:

• Employees may need to be employed for a certain period of time before

they are eligible for pay increases.

• Employees may receive pay increases automatically after a set time in

the job.
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 Pay Types
Seniority Pay:

• These pay plans assume that employees become more valuable to

companies with time and that valued employees will leave if they do
not have a clear idea that their wages will progress over time.

• This rationale come from Human Capital Theory, which states that
employees’ knowledge and skills generate productive capital known
as human capital.

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 Pay Types
Merit Pay:

• Merit Pay Programs assume that employees’ compensation over time

should be determined, at least in part, by differences in job
performance.

• Pay increases are tied to performance and the degree to which the
employee masters the job.

• Employees earn permanent increases to base pay according to their

performance.

• Merit pay rewards excellent effort or results, motivates future

performance, and helps employers retain valued employees. 25
 Pay Types
Incentive Pay:
• Incentives are used to motivate employees by paying for performance that
exceeds base-pay expectations.

• Incentive Pay is defined as compensation (other than base wages/salaries)

that fluctuates according to employees’ attainment of some standard based on
a preestablished formula, goals, company earnings.

A. Short-term is easy to measure but may not have a lasting impact on the
overall health of the organization. For example, a salesperson who receives
incentives for having the most monthly sales may be motivated to exceed
goals in the short term only.

B. Long-term can help keep high performers and provide long-term positive
results for the organization. 26
 Pay Types

Pay for Knowledge:

• Reward managerial, service, or professional workers for successfully
learning specific curricula.

Pay is based on the level of knowledge the employee has in a field. This
approach is used mainly for compensating learned professions such as
scientists or teachers. Staff professionals may also be paid this way.

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 Pay Types
Pay for Skill:

Pay is based on the number of different skills an employee is qualified

to perform. Employees increase their pay by acquiring new skills, even
if they do not use the skills on their current assignment.

This type of system is most commonly for employees who perform

physical work, and used in a production environment.

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 Pay Types
Competency-based systems:

• Companies that use competency-based pay structures reward employees

based on the skills, knowledge and experience they apply in the workplace
rather than their job title or position. This approach is designed to motivate
employees to become aspirational, build on their existing skills and apply
these in their job.

• Pay is based on the level at which an employee can operate in defined

competencies, such as training other employees. This type of system is
commonly found when rewarding professional groups of employees.
(Competencies are the skills, behaviors and knowledge that are needed to
succeed in a specific job.)
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 Pay Types
Pay Mix :
Refer to the combination of core compensation and employee benefits
components that make up an employee’s total compensation package.

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 Pay Types

Test Your Knowledge

https://create.kahoot.it/details/pay-types/5a4667d6-
04ee-4bd8-89d8-0892684238c6

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Compensation Philosophy

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 Compensation Philosophy
How the organization prefers to set pay levels for its various job titles compared
to the market (at the market, ahead of the market, at the market, on a total
compensation basis, etc.).

• What the balance is between internal and external equity?

• The roles of managers, compensation, and HR in managing pay?
• What technology or systems will be used to manage pay?
• Frequency and timing of key events, such as merit increases (annual or
semiannual, etc.)?
• The type of incentives in use, as well as eligibility?
• The scope and type of programs used (e.g., extent of variable pay).
• The role of quasi-compensation systems, such as rewards and recognition.
Ex. Sample compensation philosophy

• ABC believes in creating a high-performance culture for our

employees. In our belief, a motivated and engaged workforce will
provide job satisfaction for our employees, above-average shareholder
returns, and sustain our high-performing culture.

In general, all of our programs have the following components:

• Base salary is based upon local market conditions and targeted to be just
below market.
• Incentives are offered to all employees, with the opportunity to achieve
• All other employees participate in local productivity incentive programs
based upon local objectives.
• All employees are eligible for annual merit increases, which are designed
to be competitive with other manufacturing employers of our size.
 Assignment
Explain your approach to outline your “Compensation
Philosophy” using the questions you learnt to draft a Comp.
Philosophy

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Thank You

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