HRM

HRM 611:
611: Compensation
Compensation Policies
Policies

Compensation Philosophies
By
Prof. Nazrul Islam, PhD
Canadian University of Bangladesh
 Learning Objectives
After reading this chapter you should be able to:

 Define Compensation Philosophy

 Understand the Factors influencing Compensation
Philosophy
 Know the Development of Compensation Philosophy
 To identify the factors considered in deciding the
compensation
 To know link between Compensation Philosophy and
Compensation Policy
 Questions

Prof. Nazrul Islam, PhD 9–2

 Define Compensation Philosophies
A company’s compensation philosophy refers to the set of guiding principles
that drive decision making about compensation. In its compensation
philosophy, the firm will spell out why it makes the choices it does about how
to pay employees. This philosophy differs from business to business, but every
company seeks to hire and retain the best talent, and it will express that
sentiment in its compensation philosophy. All companies with employees must
determine how and what to pay their workers and when to offer things like
raises, bonuses and other incentives. Businesses of all types tend not to do this
haphazardly. Rather, they evolve what is called a compensation philosophy.
This is an actual plan for how employees are to be paid, when payments will
rise, and when bonuses are appropriate. Such a plan is often made available to
employees, so they have a sense of the organization’s philosophy and can thus
determine their treatment by the organization, as it relates to compensation, not
just at present but also in the future.

Prof. Nazrul Islam, PhD 9–3

 Factors Influencing Compensation
Philosophy
Some of the factors that influence compensation philosophy include present
revenue of the company and expected profits in the future, market value of the
jobs for which the company is hiring, and degree of competitiveness in the
types of jobs a company offers. The way an organization views its employees
and its responsibility to those employees’ factors into the development of a
compensation philosophy too. Essentially, many different 30 elements may
contribute to the way an employer determines rate of pay, raises and bonuses. It
may be easy to create a compensation philosophy in some fields. For instance
those that require rising levels of expertise and education usually have set rates,
and they may have a salary range that matches market value prices and that
gives employees something to aim for. Hospitals, for example, can hire
employees of numerous types, and clearly compensation will be different for
nurses than it is for doctors or janitors.

Prof. Nazrul Islam, PhD 9–4

 Factors Influencing Compensation
Philosophy, Contd.,

1. Company revenue/budget
2. Expected profit
3. Market value of the job
4. Competitiveness in type of job company offers
5. Organization views of employees and their
responsibilities

Prof. Nazrul Islam, PhD 9–5

 Developing a Compensation Philosophy
A compensation philosophy lays out the guiding principles for a
company compensation policy. It serves as a mission statement of
the company policy. Some important questions to be raised before
develop compensation Philosophy:

 How does current compensation strategy support the goals of

the organization?
 Where does company sit regarding compensation in their
industry and market?
 Does company demonstrate fair, equitable, and competitive pay
practices?
 How do each employee’s talents link to the organizations goals?

Prof. Nazrul Islam, PhD 9–6

 Types of Compensation Philosophy

Usually, there are two types of philosophies of compensation

rates/wage rates including the productivity philosophy and
purchasing power philosophy.

Productivity Philosophy: which is relates to high wages and low

unit cost of production which assumes:

 That the employers should provide the best possible tools,

machines, goods and buildings etc., while the management should
apply the latest production technique

Prof. Nazrul Islam, PhD 9–7

 Types of Compensation Philosophy,
Contd.,

 That the production should increase without the uses of

commensurate physical efforts of employees while the unit cost of
production should decrease leading to lower prices of goods.

 That the market for goods should expand leading to enhanced

sales volume and

 That the part of resultant enhanced profits should be used to

increase the wages of the employees and remaining can be
ploughed back in the business

Prof. Nazrul Islam, PhD 9–8

 Types of Compensation Philosophy,
Contd.,
1. Purchasing Power Philosophy: makes the following
propositions:
 That the workers should be paid high wages because they
form a large proportion of the work force and are equipped with
a higher propensity to consume. It results in expansion of the
economy’s purchasing power supply
 That effective demand for goods and services produced
should enlarge in each establishment
 That productivity per worker should increase while the unit
cost of output should decrease leading to enhanced profits and
 That increased wages should be paid from this enhanced
income to average the cycle.

Prof. Nazrul Islam, PhD 9–9

 Types of Compensation Philosophy,
Contd.,

2. Purchasing Power Philosophy: makes the following

propositions:
 That the workers should be paid high wages because they
form a large proportion of the work force and are equipped with
a higher propensity to consume. It results in expansion of the
economy’s purchasing power supply
 That effective demand for goods and services produced
should enlarge in each establishment
 That productivity per worker should increase while the unit
cost of output should decrease leading to enhanced profits and
 That increased wages should be paid from this enhanced
income to average the cycle.

Prof. Nazrul Islam, PhD 9–10

 Compensation Philosophy to Develop a
Compensation Policy
Once a company compensation philosophy is ready it will
continue the process of developing a compensation policy. A
solid compensation policy is the beginning of a well constructed,
defensible compensation program. The compensation policies
are guidelines for action. They are decisions which are applied to
recurring situations. Therefore, they are called standing
decisions. Since they are applied again and again, they should be
designed with great care so that they can remain applicable for
fixed periods of time or until operating conditions demand their
alteration.

Prof. Nazrul Islam, PhD 9–11

 Compensation Philosophy to Develop a
Compensation Policy, Contd.,

The compensation policy provides a frame work company

compensation program. Following are steps to make
compensation policy more effective:

➢ Keep company compensation policy in the format in which

other policies are written. This way it is consistent with other
company policies.
➢ Include language reflecting the company’s intent to create
equitable and fair pay practices free from discrimination.
➢ Before a legal review, company may want to consider asking
key stakeholders and the board to review policy’s language.
➢ Request sign off on the policy by an executive such as the
CEO or president.

Prof. Nazrul Islam, PhD 9–12

 Company compensation Policy Should
Include
 Defining the market company will use for external market
comparison or “competitive set.”
 A definition of the process used to determine internal equity (job
evaluation).
 The different types or elements of compensation.
 Clearly defined management responsibilities.
 A guide for the administration of the compensation program.
 Minimum wages and salaries
 Methods of wage/salary payment
 Profit sharing and incentive plans
 Non monetary rewards
 Procedure for getting pay
 Whether to pay prevailing or more than prevailing salary scale

Prof. Nazrul Islam, PhD 9–13

 Types of Compensation Policies
According to Dunn et al compensation policies should be
established to cover at least the following compensation
subjects:

1.The general compensation level;

2.The wage and salary structure; and
3.Formulas based on time or productivity governing
disbursement of wage or salary funds to individuals.

Each of these compensation policies should be related to

specific compensation objectives to recruit, retain and
motivate individuals and teams to work towards the
achievement of organization goals.

Prof. Nazrul Islam, PhD 9–14

Prof. Nazrul Islam, PhD 9–15