Introduction

Compensation is a HRM function that deals with every

type of reward individuals receive in exchange of
performing organizational tasks.

It can be financial or non financial


Objective of compensation
According to Pattron effective compensation should
have following factors :
1. Adequate
2. Equitable
3. Balanced
4. Cost-effective
5. Secure
6. Incentive-providing
7. Acceptable to the employee
Pay Differential
Allows firms to recognize contribution of different
employees towards organization goals

Provides organizations with an important tool for
emphasizing norms of enterprise

Helps in maintaining internal equity

Allows firms to recognize market changes between jobs in
the same grade

Methods of Payment
Flat Rates
Single flat rates are often paid
Seniority and experience do differ
Performance differentials are ignored

Payment for Time Worked
Wage pay calculated at an hourly rate
Salary pay calculated at an annual or monthly rate
Wages and salaries are adjusted once a year

Methods of Payment
People-Based Pay
Skill-based Pay
Knowledge-based pay
Credential-based pay
Feedback Pay
Competency-based pay

Executive Pay
Growing dramatically for the past two decades
Managers use their power over boards to obtain higher
compensation

Variable Pay
Any compensation plan that emphasizes a shared focus
on organizational success, broadens opportunity for
incentives to nontraditional groups (such as
nonexecutives or managers), and operates outside the
base pay increase system
Component of successful variable pay
system
Support by management : Executives and line mangers
must demonstrate commitment
Acceptance by employees: Employees must accept the
plan as equitable
Supportive organizational culture: Must be based on
teamwork, trust and involvement of employees when
setting goals
Timing: Must be launched when there is minimal risk of
economic downturn

Incentive compensation
Merit Incentive
Pay increases based on rated performance over a time period
Can work in circumstances where the job is well designed
and the performance criteria is assessable
Problems
Employees fail to make connection between pay and
performance
Secrecy of reward is perceived as inequity
Size of merit award has little effect on performance
Incentive compensation
Individual Incentives
Straight piecework: Pay determination is based on
units of production per time period
Standard-hour plan: Wages based on completion of a
job in some expected period of time
Taylor Plan: Uses two separate piecework rates
Production Bonus System: Bonus when employee
exceeds the standard
Commission: Based on percentage of sales

Incentive compensation
Team Incentives

Difficult to measure individual output
Cooperation is needed to complete a task
Reduce administrative cost
Small-group incentives
Organization wide Incentives
Organization wide Incentives: Suggestion Systems

Oldest Management tool
Formal method of obtaining employees advice about
improvement in organizational effectiveness
Key to successful systems is employees involvement
Essential elements: Management commitment, Clear goals,
Designated administrator, structured award system, Regular
Policy and Immediate response to suggestions


Organization wide Incentives
Organization wide Incentives: Gain sharing
Company wide group incentive plans for distributing gains
Lincoln Electric plan: Employees are paid for what they
individually produce
Scanlon Plan: Group incentive and employee participation
scheme
Rucker Plan: Based on employees involvement and
suggestion
Impro Share: Ties economic rewards to performance
without any attempt at participation

Organization wide Incentives
Organization wide Incentives: Profit sharing
Distribute a fixed amount of total organizational profit
to employees
Ways
Current distribution plans
Deferred plans
A Combination of both
Advantages
Do not need elaborate cost accounting system
Easily implemented by companies of any size


Issues in compensation
Pay Secrecy
Open System
Secret System
Pay Security
Guaranteed annual Wage
Supplementary unemployment benefits
Cost of Living Adjustments
Severance Pay
Pay Compression
References
Human Resource Management Text and Cases VSP
Rao
Human Resource Management John M Ivancevich

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