HUMAN RESOURCES SYSTEMS &

PROCESSES

Term Paper

On

COMPENSATION SYSTEMS

Submitted to
Prof. C.P Shrimali

BY

Priyanka Gupta
10PGHR30
INTRODUCTION
Compensation administration is one of the management’s most difficult and
challenging human resource areas because it contains many elements and has a far-
reaching impact on an organization’s strategic goals.

Definition: It is the total of all rewards provided employees in return for their
services. The overall purposes of providing compensation are to attract, retain and
motivate employees.

Compensation is an integral part of human resource management and is a

dominant factor in motivating employees and increasing employee effectiveness.
The rewards package offered by organizations is a mix of extrinsic rewards that are
controlled by organization (i.e. wages, salaries, pensions, promotions, praise and
employee achievements) and the intrinsic rewards that an employee gives to
himself for good performance( the satisfaction that comes from the feeling of
having accomplished something worthwhile). The increasing competition in labor
market, expanded employee pay information, increasing employee turnover and
increased variability in pay packages has made compensation a matter of great
interest to the organizations.

PURPOSE

• Compensation systems should be designed to support the organization’s

business strategy and to adapt to the social, competitive and regulatory
pressures in the environment.
• Ultimate purpose is to gain and sustain competitive advantage.
• Different business strategies translate into different compensation
approaches.

ALTERNATIVE APPROACHES
• Contingency- Fit the compensation system to the different business and
environment conditions.
1. One size does not fit all.
2. Focus on what is the best strategic approach.
 • Best Practices
1. One best way exists that is valid for all companies.
2. Focus on how best to implement the system.

GENERIC CORPORATE- LEVEL STRATEGIES

• Growth Strategy
• Stability Strategy
• Survival Strategy

HR NEEDS IN CORPORATE STRATEGIES

Growth
Hr Role Internal External

• Focus of firm • Build on • Acquire

strengths Companies
• Training • Varied needs • Conflict
resolution
• Staffing • Hire & Promote • Integrate new
cultures acquire
new skills
• Compensation • Incentive • Standardize
Targets practices
• Performance • Behavior and • Standardize
management results oriented practices
HR Role Stabilty

• Focus of firm • Save costs/ Reduce manpower

• Training • Sharpen current skills

• Staffing • Promote from within

• Compensation • Internal Pay equity

• Performance • Behavior Oriented

management

HR Role Survival

• Focus of firm • Things they do best

• Training • Only where essential & promote from

within
• Staffing • Internal Pay equity
Lower than market
• Compensation • Only key people awarded

• Performance • Behavior oriented

management
MATCHING PAY STRATEGY TO CORPORATE STRATEGY

Corporate Strategy
Stability Growth
• Pay Strategy • Low • High
Dimension
• Time Orientation • Short Term • Long Term
• Pay Level • Above market • Below market
(Short run)
• Pay Level • Below market • Above market
(Long run)
• Benefits Level • Above market • Below market
• Where Pay • Centralized • Decentralized
Decision Made
• Pay Unit of • Job • Skills
Analysis

GENERIC BUSINESS-LEVEL STRATEGIES

• Innovator
• Cost Cutter(Leader)
• Customer focused
TAILOR THE COMPENSATION STRATEGY TO THE BUSINESS
UNIT STRATEGY

Innovator Cost Cutter Customer

• Reward • Focus on • Customer
innovation to competitors satisfaction
products and labor costs incentives
processes • Increase • Job and skills
• Market driven variable pay valued by
pay • Emphasize customer
productivity contact
• Focus on
systems control
& work
specifications

OBJECTIVES
How should compensation support the business strategy and be
adaptive to the cultural & regulatory pressures in the environment.
• Consistency
• Competitiveness
• Contributions
• Administration

PAY SYSTEM OBJECTIVES

• Attract employees
• Retain employees
• Motivate performance

KEY STEPS TO FORMULATE A COMPENSATION STRATEGY

1. Assessing total compensation implications
• Cultural Values
• Social, Economic and Political Context
• Global Competitive pressure
• Employee/ Union needs
• Other HR Systems
 2. Fit Policy Decisions to Strategy
• Objectives
• Constitution
• Consistency
• Administration
• Competitiveness
3. Implement Strategy
• Design System to translate strategy into action
• Choose techniques to fit strategy
4. Reassess the fit
• Realign as conditions change
• Realign as strategy changes

TESTS OF COMPETITIVE ADVANTAGE: COMPENSATION

• Does it add value
1. Attract and retain critical talent
2. Control costs
3. Motivate people to learn and improve performance
• Is it difficult to imitate?
1. Fit with strategy
2. Fit with other HR functions
3. Implementation over time

COMPENSATION THEORIES

Compensation theories are generalizations which explain all the questions and
queries about the relationship between a person, his work and the rewards he
receives.
Compensation theories can be divided into two major branches-

1. Wage Theories - A wage is actually a price and therefore a wage structure is a

subsystem of prices. In understanding the wage theories three concepts are used-
concepts of supply and demand, concept of the short run and the long run, the
concept of micro and macro economic analysis.

(i) The subsistence theory of wages- this theory like all the other theories,
generalizes that in the long run, the general wage level will stick at a
subsistence level. The major emphasis is on the supply of labor but it says
that in the short run, the demand of labor may pull the wage level above the
 subsistence level. It says that the major factor that controls the wage
determination is population. Though there will be deviations in the short run,
in the long run wages will hover at the subsistence level only. The theory is
about an economic system at the macro level. It is not specified for a unit or
at the micro level.

(ii) The wages-fund theory of wages- the basis of this theory is that the wage
level is the ratio of a fixed fund to the number of laborers. For instance if the
fixed fund is the Rs. 200 and number of workers is 20, the wage level will be
rs. 10. This theory takes both demand and supply into the account and
opposes the labor unions. It is a short run analysis as in the long run the fund
may increase or shrink. Like the previous theory, it is a macro level analysis.

2. motivate-to-work theory –work organizations attract and retain employees. To

do this, they have to keep the employees motivated

Motivation

Compensatio
n Package

Employee Need
Retention Satisfaction

The physiological needs basic needs derived mainly by money. Money is a

major motivational factor. Motives can be classified as follows-
(i) homeostatic motives( hunger, thirst, avoidance of high temperature
and loud noises)
(ii) sexual motivation
(iii) emotional motives( fear, anger, rage ,horror, terror, agony, anxiety,
love, happiness)
 (iv) intrinsically motivated behavior(functional autonomy, sensory
curiosity cognitive)
(v) social motivation(achievement, affiliation)

JOB ANALYSIS

Job analysis is a systematic approach to defining the job role, description

and requirements, responsibilities etc. the uses of job analysis are-
(i) Internal wage structure decisions
(ii) Wage level decisions
(iii) Wage surveys
(iv) Employee appraisal decisions
(v) Training decisions
(vi) Organizational design decision
(vii) Employment and job design system
(viii) Salary and health decision
(ix) Relocation of work decisions
Thus job analysis is an integral part of an organization. It provides a basic
framework for the compensation analysis as the analysis is based on the
information gathered the job analysis.

JOB EVALUATION
It is a process of ascertaining the value of a job within an organization
relative to all other jobs in that organization.
It is an important base on which the decision of money wage rate can be
relied in. The process all the compensable factors must be considered. It
must consider the inherent features of the job and extraneous factors should
be excluded. Job evaluation works as an important basis for establishing
wage rate for every job. Without an analysis, the wage rate will be a guess or
will be a consequence of follow the leader.

TYPES OF INCENTIVE PAYMENT PLANS

TYPES OF COMPENSATION

1. DIRECT COMPENSATION

Direct Compensation refers to monetary benefits given to the employees for

the value which they offer to the company. The services rendered to the
organization are awarded through this. It may include wages and salary,
house rent allowance, performance incentives, conveyance allowance, leave
travel allowance, medical allowance, special allowance. These are provided
at regular intervals of time.

BASIC WAGES/SALARY
Basic wage or salary is the amount paid for the services rendered by the
employee. This is the major part of the compensation provided and this is
the basis of other components of the compensation structure. These can be of
various types-
1 Simple Incentive Plan- it can be based on either the price per piece for a
unit or on straight time worked. Piece rate plan is the oldest type of
incentive system. It involves paying the employee a fixed amount which is
most of the time calculated by the product costing methods.
 HOUSE RENT ALLOWANCE
The companies usually provide the housing facilities to its employees. It
comes under direct compensation and is known as HRA. In case the
company can not provide the housing to the employee or the employee
himself does not take the facility, the company pays the HRA in cash which
is a certain percentage of the basic pay of the employee.

CONVEYANCE ALLOWANCE
Companies usually provide the vehicles to the employees for the purpose of
travel. In case it can not, the company reimburse the expenses the employee
incurred on travel, it also reimburse other expenses incurred by an employee
being on an official tour which may include, staying at the place, food etc.

LEAVE TRAVEL ALLOWANCE

To enhance employee morale companies give allowance to employees to
visit any place of their choice. Many a times the company sponsors such
trips for the employee and his/her family as a part of compensation package.
It is considered an important motivator for the employee and encourages him
to do better. It also brings job satisfaction for the employee.

MEDICAL REIMBURSEMENT
Medical benefits are a very important part of the compensation packages. In
countries like USA everyone has to have a medical insurance as medical
facilities are extremely expensive. Most of the companies now a days
provide medical benefits to the employees like health insurance,
reimbursement of medical bills etc. Many companies provide monthly
medical allowance to the employees.

BONUS
Bonus is paid to the employees mainly in the festive season. Besides that,
the company also provide bonus as a tool of motivation. It is offered as the
token of appreciation and recognition to the employee for his good work.

2. INDIRECT COMPENSATION
There is much more to the compensation plans than what is paid through the
direct benefits. There are many other costs that have to be included in the
overall payroll budget. The indirect benefits include the non monetary
benefits which give value to the employees. These include retirement
benefits, insurance benefits, overtime policy and holiday home
compensation plans.

RETIREMENT BENEFITS
Besides providing compensation at the work life, the companies also provide
compensation after the work life. It provides many plans like-

1. Pension- A monthly allowance to the retired employee which is some

percentage of the salary at the work life.
2.Provident Fund- it is a specific amount paid to the employee at the time of
retirement.
INSURANCE BENEFITS
Organizations provide employees an insurance cover which can extend from
accidental insurance to health insurance to life insurance. This kind of
actions provides a kind of security and satisfaction to the employees. They
feel more connected to the company and are more comfortable.

OVERTIME POLICY
Generally organizations do have an overtime policy according to which they
provide the employees the transportation and other facilities like snacks and
dinner to the employees when they stay for long, more than the stipulated
work hours.

LEAVE TRAVEL ALLOWANCE

Today we see stress is becoming a very common problem with all
employees. Organizations do provide employees with leave travel allowance
and holiday package to employees to de-stress themselves.

HOLIDAY HOMES
Organizations provide the various facilities like holiday homes and guest
house for their employees at different locations. These holiday homes are
usually located in hill station and other most wanted holiday spots. The
organizations pay careful attention to make the employees’ stay comfortable
and avoid any kind of problem to them at such holiday homes and guest
houses.
HOW DO YOU DECIDE ANNUAL INCREASE
• Yearly Company Performance
• Individual Performance
• Cost of living increase (COLA)
• Merit based increase
• Market based increase
• Annual Wage agreements

CONCLUSION

Compensating Employees entails a very delicate balance between employees

expectations and company’s financial goals. There are limits as to which
companies can increase the salaries because they also need to maintain the
bottom line. So companies need to adapt to the changing environment and
look for non monetary benefits which can enhance employee morale.
According to a survey, the top reason for employees leaving companies is
that they are not happy with their bosses and second reason is that they feel
their value has dropped and are not finding opportunities. Employees are
company’s most valuable assets and we should make sure we treat them that
way. It is worthwhile to note that it’s not always the money but also a “Well
Done” note from the boss can help to boost the employee morale.