Compensation

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Competitive Edge
An edge over its competitors

Value creating strategy


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Employees
Last weapon of competitive advantage

Products can be quickly duplicated but not

------ innovation, execution & knowledge


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Relation between competitive
advantage & Human Resources
First postulated by Barney (1991) in his Resource
Based View Model

Acc. To this a firms bundle of resources
determine competitive advantage




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Bundle of Resources
Physical capital-plant, equipment

Organizational capital-structure, planning

Human capital-skills, knowledge




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Since compensation is prime source of
attracting & retaining talents, therefore
compensation management is a crucial
element of HRM
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Compensation
Cash and non-cash rewards employees receive in
exchange for their work
Effective compensation management
Employees more likely to be satisfied and motivated
Compensation perceived to be inappropriate
Performance, motivation and satisfaction may decline
dramatically
Employee turnover may occur
Dissatisfaction with absolute or relative pay


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The Objectives of Compensation
Impacts an employers ability to attract and retain
employees.
Ensure optimal levels of employee performance
in meeting the organizations strategic objectives.
Compensations components
Direct compensation in the form of wages or salary
Base pay (hourly, weekly, and monthly)
Incentives (sales bonuses and or commissions)
Indirect compensation in the form of benefits
Legally required benefits (e.g., Social Security)
Optional (e.g., group health benefits)
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Cont--
To reward employees for their productive
contributions to organizations bottomline
To integrate employee efforts with
organizational performance management
systems for increased effectiveness
To build employer branding which is key to
building a pool of potential hires
To help employee meet his economic,
personal, material, social and psychological
needs & aspirations.
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Cont--
To encourage employees to develop their skills
& competencies by attaching higher value to
compensation for increased job performance
To elicit needed & desirable behaviours from
employees
To comply with labour & social legislations as
The Minimum Wages Act, 1948, Equal
Remuneration Act, 1976, Section 529-A of The
Companies Act, 1956 etc.
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Importance of compensation
management
Pg 24
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Rewards-kinds
Positive-getting a reward
-emanates from intrinsic & extrinsic motivation


Negative-avoiding punishment
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Compensation-interpretation
Organizational perspective
-employment contract
-value of job
-level of personal contributions/performance
Employees perspective
-organizational goals
-hrm goals
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Reward management defined
Reward management is concerned with the
formulation and implementation of strategies
and policies the purposes of which are to
reward people fairly, equitably and
consistently in accordance with their value to
the organisation and to help the organisation
to achieve its strategic goals
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Principles of compensation
management
Ability to pay
Internal & External equity
Performance Orientation
Non discriminatory
Legal compliance
Simplicity & flexibility
Fosters employee development

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Economic Theory of Compensation
Labour Market Theory
Subsistence Theory
Wage Fund Theory
The Surplus Value Theory
Residual Claimant Theory
Marginal Productivity Theory
Bargaining Theory
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Limitations of Economic Theory
Abstraction from reality

Unemployment & Compensation

Single compensation for a particular type of
labour
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Compensation Strategies
Pay for position

Pay for person

Pay for performance

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Pay for position
compensates for the attributes and challenges
of the position.
Based on a large initial compensation & few
variable benefits.
Depend on the level in hierarchy, nature of
job, qualification, experience & general skills
& abilities
Position is compensated rather than the
individual or the job holder.




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Pay for person
compensates for those personal and
professional attributes essential for effective
performance
Linked to the personal abilities, skills and
competencies used in job.
Organization pays for the persons skills more
than for his performance



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Pay for performance
Objective is to develop a productive, efficient
& effective orgn that enhances employee
motivation & performance
Rewards based on the outcome of their work



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Competitive Imperatives
the term compensation is a comprehensive one
including pay, incentives, and benefits offered by
employers for hiring the services of employees. In
addition to these, managers have to observe legal
formalities that offer physical as well as financial
security to employees. All these issues play an
important role in any HR departments efforts to
obtain, maintain and retain an effective work force.
So, the employers are, therefore required to know that
what are competitive imperatives which can justify the
compensation structure and the satisfaction of
employees.




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Competitive Imperatives influencing
compensation are
Productivity
Speed of work
Quality of work
Service
Learning




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Productivity

The amount of output per unit of input. There are
many different ways of measuring productivity.
For example, in a factory productivity might be
measured based on the number of hours it takes
to produce a good. Compensation is generally
decided on the productivity of an average
worker/ employee and one can earn more by
improving productivity either by doing extra
efforts to making an extra quantity or by
improving the skill level.


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Speed
the efforts put on to reduce or eliminate the
unwanted breaks/interruptions or delays
important in chain production process, group
performance
Speed of work no doubt increases the
productivity and presses a higher demand of
compensation, but speed should not refer to
quantity alone but also to the quality of work and
safety of men, machines and materials, as well as
ensure the compilation of safety rules.

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QUALITY OF WORK
Quality is the totality of features and
characteristics of a product or service that
bear on its ability to satisfy stated or implied
needs
in the case of performance, which could be
measured in terms of quantity as well as
quality both become imperative to justify the
compensation
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SERVICE
Services refer to attitude, habits and behaviour of the
employees, which are to the ways of offering
intellectual, manual or combined efforts to do any job
Quality of service includes time keeping, attitude and
behaviour at work place, quick understanding of the
problem, the ability to quickly arrive at a conclusion to
a solution and promptness to attend the complaints.
The compensation differentials, therefore could be
generally seen in the same type of service offered by
different individuals.

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LEARNING
refers to concerted activity that increases the
capacity and willingness of individuals, groups,
organizations and communities to acquire and
productively apply new knowledge and skills, to
grow and mature and to adapt successfully to
changes and challenges
The performance of individual can go on
increasing if he/she has an aptitude for learning.
more learning enhances conceptual and
behavioural knowledge which can help him/her
to earn more.
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Economic Influences
macro economic factors
Economic development of the region or country
Educational attainments
Attracting and retaining high performing
employees
Skill availability
Extent of industrialization
Changing nature of work
Consumerism




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Economic development of the region or country
Regions /countries which are developed &
economically sound are able to generate more
industrial activities, more employment
opportunities
Hence more ability to pay


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Educational attainments
Countries with higher literacy rates are
endowed with population with academic &
professional skills

Eg Japan, Singapore lacking natural resources
but educationaly endowed

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Attracting and retaining high performing
employees
Successful organizations are designing solutions
that truly link compensation to business
performance
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Skill availability
Indian IT professionals tend to enjoy higher
compensation in US & other western
countries than India due to shortage of
trained & skilled IT professionals
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Extent of industrialization
Higher levels of industrialization create more
employment opportunities creating more
demands on the labour market
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Changing nature of work
Envts of orgns have moved from being
relatively stable, simple, orderly, predictable &
local to one of discontinuous change
complexity, chaos, ambiguity & global.

Therefore compensation revolution

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Consumerism
Societies characterised by consumerism tend
to generate increased demand for products &
services

It forces orgns to employ more & more
employees, pushing up compensation in
favour of employees
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micro economic factors
Organizations ability to pay

Competitive scenario

Skill levels

Organizational size




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Organizations ability to pay

Orgns with high performance are often more
profitable entities




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Competitive scenario


Stiff competition requires orgns to produce
goods or render services with better quality,
both economically & efficiently

This requires competent personnel
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Skill levels



Availability of appropriate skills is necessary to
competitive advantage
Rare or highly valued skills command higher
compensation


Organizational size
Size of organization affects the compensation of
employees.




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