Compensation Management Module 1

PBA2321D Compensation
Management
SEM III MIM

Course Outcomes CO 1 Demonstrate the procedures involved in
the formulation of compensation strategy.
CO 2 Evaluate job based structures and person
based structures for designing
compensation.
CO 3 Sketch the components of compensation,
incentives and fringe benefits.
CO 4 Examine the compensation related legal
regulations in India.
CO 5 Design a compensation management
model for an organization in the
international context.
PBA2321D Compensation Management
Syllabus
Module 1
Compensation Strategy Formulation
Module 2
.
Job Evaluation
Module 3
Compensation Components
Module 4
Laws Related to Compensation
Module 5
International Pay Systems

M1 M
M54
Concept significance
Syllabus
and strategic role of Practical problems in
Integrated Materials Management of dead
Management, Materials stocks, surplus stocks and
planning and scraps, Systems &
Procedures for disposal
forecasting, Material
Planning – Factors M2 M3 M4 and Control, Materials
Handling and
affecting Material Transportation Management
planning – Techniques Definition- Purchasing Case Studies, Evaluation of
of material planning Classification of Fundamentals - 5Rs, Stores Management Materials Management
Materials Requirement Inventories- Need for Make or Buy, Source Concepts, Location Performance, Materials
Planning (MRP). inventories, Inventory Selection, Vendor and layout of handling
Planning and Control Rating and Vendor Warehouses, Different Equipment-Cranes, Tower
Models –EOQ Model, typical models, Stores cranes, lifting equipment,
Development, Value
Quantity Discounts, Procedures and Series lifting equipment,
Analysis, Purchase Lifting platforms,
Reorder point, Lead Negotiations, Purchase Records for Receipt,
Inspection, Issue, Continuous mechanical
Time Analysis – Safety Timing Purchase handling equipment,
stocks – Q System – P Contracts, Purchase Reorder checking –
Monorail conveyors, Belt,
System – S System, Insurance, Purchasing Kardex Stores chain and overhead
Classification, Capital Goods, Accounting, Stores conveyors, Industrial
Codification, Universal Seasonal Goods, audit. trucks.
product Code, RF Id Imported Goods,
System, ABC analysis Deferred Payment
–VED, GOLF, FSN, Schemes – Lending
HML. Institutions Leasing
Trends. .
OBJECTIVES OF COMPENSATION
Internal vs External equity
External and internal pay equity are two essential concepts that need to
be factored in when developing compensation packages. External pay
equity refers to the pay levels of an organization’s employees in
comparison to those of its competitors in the same industry or
market. In contrast, internal pay equity refers to the fairness and equity
of pay among employees within an organization.
External pay equity:
• Comparison of pay levels with other companies in the same industry
or market
• Determines if employees are paid at or above the market rate
• Considers factors such as the size of the organization, location, and
industry.
• Crucial in attracting and retaining top talent.
Internal pay equity:
• Fairness and equity of pay among employees within an organization
• Ensures that employees are compensated fairly and equitably based on their
skills, responsibilities, and experience level, regardless of personal
characteristics
• Considers factors such as job duties, experience, and performance
• Important for promoting fairness and ensuring employee satisfaction within
an organization.
COMPENSATION PHYLOSOPHY
HR to Practice
CONCEPT OF COMPENSATION
Compensation is a systematic approach to providing monetary
value to employees in exchange for work performed. It is a tool
used by management for a variety of purposes to further the
existence of the company. It may be adjusted according to the
business needs, goals and available resources.
Compensation may help to achieve several purposes, such as
recruitment, job performance and job satisfaction. It is also
defined as the package of quantifiable rewards an employee
receives for her or his labour
Compensation represents both, the intrinsic (psychological mindsets resulting
from job performance) and extrinsic (including both monetary and non-
monetary) rewards. The term, compensation, refers to all forms of financial
returns and tangible benefits that an employee receives as a part of
employment relationship.
• To recruit and retain qualified employees.
• To increase or maintain morale/satisfaction.
• To motivate employees for better performance.
• To attract and retain skilled and talented workforce.
• To determine basic wages and salary administration.
• To achieve internal and external equity.
• To ensure equal pay for equal work, that is, each individual's pay is fair in
comparison to that of another person doing a similar job.
• To support, communicate and reinforce an organization's culture, value and competitive
strategy.
• To reduce turnover and encourage company loyalty.
• To reward for exceptional job performance with plans including bonuses, commissions,
profit sharing, stocks, gain sharing etc.
• To control cost - A rational compensation system helps the organization to obtain and retain
workers at a reasonable cost.
• Comply with legal regulation -A sound wage and salary system consider the legal
challenges imposed by the government and ensures the employees compliance.
IMPORTANCE OF COMPENSATION PROGRAM
To the employer: Compensation represents a significant part of
employers cost, is increasingly important to his employee's performance
and to competitiveness and affects his ability to recruit and retain a
labour force of quality.
To the employee: because it is fundamental to employees standard of living and is

a measure of the value of his/her services or performance.
To the government: because it affects the aspects of macroeconomics, stability

such as employment, inflation, purchasing power and socio-economic development
in general.
Compensation will be perceived by employees as fair if based on systematic
components. Various compensation systems have developed to determine
the value of positions. These systems utilize many similar components
including job description, salary ranges/structure and written
procedures.
DESIGNING A COMPENSATION SYSTEM
Most people think the pay and compensation to be the same, but
the fact is compensation is much more than just the monetary
rewards provided by an employer.
Compensation is all forms of financial returns and tangible
services and benefits employees receive as a part of an employment
relationship".
The phrase "financial returns" refers to an individual base salary, as
well as short and long term incentives. Tangible services and benefits
are such things such as insurance, paid vacations and employer
discount.
A guideline for designing a compensation plan begins at the top by
examining the better strategy and ends with a model that is ready to
be implemented. There are various steps that help as organization to
design a performance based compensation strategy and prepare the
organizations design. Inadequate use of incentive plans and problems
with compensation design and strategy often fails to motivate
performance of an employee.
The good performers prior to new compensation plan
implementation remain "good performers and may not improve
much because they are already giving close to 100% effort, but the
middle and the bottom performers are where there is significant
opportunity for change.
(1) Focusing on the strategic objectives
The most important goal in designing an compensation system is supporting the
strategic objectives of the organization and ensuring the system that fit in with the
organization structure and strategy. There are various questions which should be
focused before designing compensation strategy such as:
• What is the mission of the organization?
• Why does it exist?
• What are the strategic goals and objectives for the next five years?
(1) Focusing on the strategy objectives
• Whether current employee have the skills to meet these objectives? If so,
will they be rewarded for having them? If not, will internal candidates be
trained to gain skills or will the organization recruit externally to fill the
goals?
• What is the organization's strategy?
• Do employees work individually or in teams?
• Are employees seen as costs or investments?
• What is the cost to replace employees?
• What is the desired turnover rate?
• What should the organization's compensation plan to accomplish?
• How would you describe the current total compensation package,
including benefits retirement time off etc., at the organization?
• How does it compare with that of other employees in the market. What
should the organization pay in relation to the market?
• What is the appropriate balance between external market equity and
internal worth.
Once there is an understanding of the answer to these questions, the
compensation can be developed, policy guidelines are prepared.
(2) Ensuring commitment through communication and participation
An organization must plan for making change to its compensation system.
Before beginning to tackle something, it is important that executive
management is absolutely committed to the process, the result and the
implementation.
(2) Ensuring commitment through communication and participation
All important techniques for participation and communication by the clearly
defined by the advisory or steering committee. A compensation review
committee could help identifying current issues with compensation, job
clarification or salary administration. It could contribute ideas and feedback
to provide valuable advice.
(3) Analyzing job functions
A job analyst develops a current and thorough understanding of the work that is being
formed by the employee. It is important to undertake a job analysis before making
changes to the compensation plan as job analysis provides a collection of relevant
information on the type. scope and responsibility of each Job. It is the foundation for job
description and how they are in the market. It enables the organization to establish
baseline information about a job level of responsibility and qualification. and to compare
it to the market place. It also ensures and documents our compliance with legal
requirement.
(4) Writing job description

Once the information is collected through the job analysis process, it can be used
for preparation of job description. A job description summarizes the important
component like the general nature of the work, specific tasks, responsibilities and
outcome competence required to perform the job. A written job description should
be considered a final document. Before it is finalized, it should be received and
accepted by both the employee and the supervisor.
(5) Determining internal pay equity
It determines fairness with in the organization. Fair pay is pay that employees
generally view as equitable. Internal equity is determined by job evaluation techniques
such as whole job ranking method and factor comparison technique.
(6) Determining external pay equity
It is the perceived fairness in pay relative to what other employees are paying for the
same type of labour. An externally focused job evaluation method includes the market
pricing slotting method. For maximum flexibility, using market pricing is
recommended to that of market competitive pay rates. Market competitiveness is more
flexible and adaptable than other methods. To gather competitors pay rates. a survey
method is developed which includes the following steps:
• Establish a timeline
• Select bench-mark positions to survey
• Target survey participants
• Design questionnaire
• Use other available market data sources
• Follow up and verify answers with participants.
(7) Designing salary structure Compensation Management
Once collection of market data and determination of a hierarchical ordering of
position, is done a salary structure can be designed. Salary structure consists of jobs
of equal value that are grouped into grades with competitive salary ranges. Pay
ranges are the rates from the minimum to maximum of each grade. Positions are
assigned to grades and pay ranges based on job content, marketing or external equity
and internal equity. Each salary range includes minimum, midpoint and maximum
salaries, with the midpoint representing the market or going rate for the job.
(7) Designing salary structure Compensation Management
Typical compensation design problems includes:
• Failure to tie pay closely to achievement of objective and realistic performance
measures.
• Failure to regularly measure and provide feedback on performance.
• Failure to design variances in pay-related to performance that are large enough to be
perceived by the employer as worth the effort.
• Over reliance on salary as the only significant method of financial rewards.
FORMS OF PAY
FORMS OF PAY
Attitudes
Communication
Creativity
Culture
Emotions
Genetics
Intelligence HUMAN BEHAVIOUR
Knowledge
Manners
Psychology
Social Norm
Sociology
Values
Components of Compensation Management
Components of Compensation Management
Objectives & Benefits of Compensation Management
Principles of Compensation Management
Importance of Compensation Management
Importance of Compensation Management
Compensation Plan
Dark Triad Personalities: Narcissism, Machiavellianism, and Psychopathy
Merit Increase and Why Does it Matter
Joanna is a top-performing employee for an organization, and she was able
to successfully achieve and exceed the company’s goals by 5% for that
year. Hence, she would be able to see her effort reflected in the merit
increase in her salary. In comparison, Ashley in the same organization
would only be receiving her normal salary as she was unable to achieve or
exceed the company goals that year.
A merit increase is a pay raise
given to an employee based on
their performance. This is
often used as an incentive to
motivate employees in the
workplace by recognizing
their hard work. When
implemented well, a merit
increase can also be used as a
retention, productivity, and
performance management tool.
The difference between a merit increase and a pay raise lies in the criteria. A
merit increase is a boost in pay as a result of excellent work, while a pay
raise isn’t necessarily related to the quality of work. A merit increase is a
type of pay raise that is given based on how employees perform at work. It is
often used to reward the top-performing employees within the company. As a
result, this can encourage employees to achieve company goals while relating
their efforts and goals to the increase in their salary.
Analytics to determine merit increases
• Determine if an employee’s performance financially impacts the
business
• Objectively assess performance
• Determine whether merit increases will work
• Model out the increases
Analytics to determine merit increases
• Determine if an employee’s performance financially impacts the
business
• Objectively assess performance
• Determine whether merit increases will work
• Model out the increases
How to Start a Merit Increase Program
• A merit increase program rewards excellence in the
workplace. It helps organization to attract top talent and
improves productivity, retention, and engagement.
Merit increases are important because they encourage and incentivize
employees to meet performance and productivity targets. They also show
that your company values and rewards strong performance, thereby creating
a culture that values good work and results. By doing so, you motivate
employees to perform better, which in turn yields better revenue, employee
retention, and engagement.
Merit increases reward top performers for their hard work. But employees
aren’t the only ones who see the benefits. They become a real asset for
companies as well, helping them in various ways. They can:
• Encourage productivity
• Help organizations to track progress and business impact
• Increase employee engagement
• Improve retention.
Track progress and business impact
To award a merit increase, organization first need to track
progress and business impact. It is not done by looking at who
works the hardest. The organization want to see who can
exceed company goals and by how much. Often, this
percentage is taken into account when calculating the merit
increase.
Encourage productivity and workplace effectiveness
• Knowing that a merit pay increase policy exists within the company will motivate
employees. It will encourage them to be more productive, reducing procrastination
and increasing effectiveness. Plus, a transparent merit increase program makes
it clear what expectations the company has for its employees. People no longer
need to guess if their performance is good enough or if they’re going over or under
the company goals.
• A quick look at the criteria for merit pay will help them understand what is
expected of them.
Increase employee engagement
• Employee engagement is one of the key elements in talent retention
strategies. A merit increase program can help with that.
• When employees know what goals they need to be working towards,
they’re more likely to be active participants in various company
activities. This ‌boosts performance and increases productivity.
Improve retention
Last, but not least, merit increase programs improve retention. When
organization show people recognition and appreciation for a job well
done, they’re less likely to leave. Employees stay with companies that
value their hard work.
It can be said that compensation is the “glue” that binds the
employee and the employer together and in the organized
sector, this is further codified in the form of a contract or a
mutually binding legal document that spells out exactly how much
should be paid to the employee and the components of the
compensation package.
Compensation Management is something that companies must
take seriously if they are to achieve a competitive advantage
in the market for talent.
Formulating a compensation strategy involves several key

procedures and steps to ensure alignment with organizational
goals, market competitiveness, and employee satisfaction.
Formulating a Compensation Strategy
1. Assess Organizational Objectives and Strategy
Review Business Strategy: Understand the organization's short-term and
long-term goals, market position, growth plans, and financial health.
Identify HR Goals: Determine how compensation can support HR
objectives such as attracting talent, retaining employees, and motivating
performance.
2. Conduct a Compensation Analysis
Market Analysis: Evaluate industry standards and competitors'
compensation practices. Benchmark against similar organizations in
terms of size, industry, and geographic location.
Internal Analysis: Review current salary structures, benefits, and overall
compensation packages within the organization. Identify gaps or areas
of improvement.
3.Define Compensation Philosophy
Establish Principles: Determine the guiding principles for compensation
decisions (e.g., pay for performance, internal equity, external
competitiveness).
Communicate Philosophy: Ensure alignment with organizational culture
and values. Communicate the philosophy to stakeholders including
employees and managers.
4. Design Compensation Structure
Base Pay: Set salary ranges based on job evaluation and market data. Consider factors
like job responsibilities, skills required, and experience levels.
Incentive Pay: Develop bonus or incentive programs linked to individual, team, or
organizational performance metrics.
Benefits and Perks: Design comprehensive benefits packages including health
insurance, retirement plans, and other perks (e.g., wellness programs, flexible work
arrangements).
5. Implement Compensation Policies
Policy Formulation: Create policies and guidelines for salary
administration, promotions, merit increases, and bonuses.
Legal Compliance: Ensure compliance with local, state, and federal laws
regarding compensation practices (e.g., equal pay, minimum wage).
6. Communication and Training
Communication Strategy: Clearly communicate the new or revised
compensation strategy to all employees. Address any questions or concerns.
Training Programs: Provide training to managers and HR professionals on
how to administer compensation fairly and effectively.
7. Monitor and Evaluate
Regular Reviews: Continuously monitor the effectiveness of the compensation
strategy. Conduct periodic reviews to assess whether goals are being met.
Feedback Mechanisms: Gather feedback from employees to gauge satisfaction with
compensation and benefits.
Adjustments: Make adjustments as needed based on internal changes (e.g.,
organizational growth) or external factors (e.g., economic conditions, industry trends).
8.Review and Refine
Continuous Improvement: Regularly review and refine the compensation
strategy to ensure it remains competitive and aligned with organizational
goals.
Stay Updated: Keep abreast of market trends and changes in legislation
that may impact compensation practices.

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PBA2321D Compensation

SEM III MIM

Compensation Strategy Formulation

Laws Related to Compensation

International Pay Systems

To the employee: because it is fundamental to employees standard of living and is

To the government: because it affects the aspects of macroeconomics, stability

(4) Writing job description

Formulating a compensation strategy involves several key

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