compensation and benefits --MBA semester 4--compensation management

Compensation in its simplest form is the payment that one gets for the work done by him either on full time or on part time basis. The issue of compensation has always been a critical issue for both the employer and the employee. Money is a crucial incentive and can be directly or indirectly stated as a medium of fulfilling human needs. On one hand, employees need it to meet their primary needs. On the other hand, the employers provide compensation to meet their firm’s objectives of manpower requirement. Employers also provide compensation to engage, motivate and incentivise employees and not only to meet manpower requirement.

In this unit, you will study the concept of compensation management, dimensions of compensation and non-compensation. You will also study the 3-P concept of compensation management, compensation as retention strategy and compensation for special groups.

1.1 Objectives:

After studying this unit, you should be able to:

❖ Explain the concept of compensation management

❖ Define the dimensions of compensation and non-compensation

❖ Describe the 3-P concept in compensation management

❖ Analyse the use of compensation as a retention strategy

❖ Identify and describe the compensation for special groups

❖ Recognise the significant compensation issues.

2. Compensation Management : Intorduction

According to Stephen P. Robbins, Davis A DeCenzo, Robin Stuart-Kotze and Eileen B. Stewart, the authors of “Fundamentals of Management”, “Compensation management is a process of determining cost-effective pay structure designed to attract and retain the employees, provide an incentive to work hard and structured to ensure that pay levels are perceived as fair”.

In the words of I. Kessler, a renowned compensation manager, “compensation management refers to payment system which determines employee wage or salary, direct or indirect rewards”.

You can say that compensation acts as a binding agent between the employer and the employee.

let us understand this concept with the help of a case let. Case Let

SAS India Pvt. Ltd.

SAS India Pvt. Ltd. is a well-known major software company in India. The company makes statistical analysis software. The company is growing rapidly from 1900 employees five years ago to the existing 5400 employees.

At its headquarters, in Mumbai, there is a 36,000 square-foot gym for employees. In addition to a well-planned basic salary, allowances, stock options and benefits there is a full-length basketball court, pool tables, a private sky-lighted yoga room and workout areas, which form part of their compensation package. Outside, there are soccer and cricket fields. Massages are available several times a week and classes are offered in dance and tennis.

The company also operates the largest day-care facility in India. To encourage families to eat lunch together, the SAS cafeteria supplies baby seats and high chairs. To encourage families to eat dinner together, the company has a seven-hour workday, five days a week. Unlike many work-obsessive software firms, most SAS employees leave the office by 5:00 PM. Management likes to call its work place culture “relaxed”.

Is this any way to run a business? Management thinks so. SAS’s strategy is to make it impossible for people not to do their work. Even though the company provides no stock option plans and salaries no better than the competitors do, the company has built an unbelievably loyal workforce.

Whereas competitors typically have turnover rates above 30 percent, SAS’s rate has never been higher than 5 percent. Management claims that it saves ` 75 lakhs a year just in employee replacement-related costs such as recruitment, interviews, moving costs for new hires and lost work time.

As stated earlier, compensation is the remuneration received by an employee for his contribution to the organisation. Compensation includes payment either in the form of annual salary or hourly wage in combination with different benefits like insurance, stock purchase option and vacations, etc.

Maslow’s Need Hierarchy Theory Maslow’s Need Hierarchy Theory considers compensation to fall in the safety needs category as reflected. In addition, there are many other factors, which account for designing an effective compensation strategy to motivate and retain effective workforce, which forms an integral part of human resource management of an organisation. Factors to be considered while designing a compensation package include

• Job analysis and evaluation

• Salary structure

• Pay scale

There are direct and indirect types of compensation. The direct type implies cash compensation – basic pay, dearness allowance, long-term incentives like equity-benefit incentives, short-term incentives, benefits, allowances and services, income-tax protection and devices meant for work-life protection.

• Direct Compensation basically refers to the benefits related to the monetary terms which are being offered to the employees in return of the services rendered by them. Thus, monetary benefits comprises of Basic Pay, HRA, Leave Allowance, Medical Reimbursement, Conveyance, Gratuity, Bonus, Special Allowance etc. Therefore, they are given at definite time and at definite interval.

The different components of direct compensation are

• Indirect Compensation basically refers to the non – monetary benefits which are provided and offered to the employees in return of the services rendered by them. Thus it includes Overtime Policy, Leave travel Assistance Limits leave policy, Holiday Homes, Retirement benefits, Hospitalisation, Car Policy etc.

You can now say that organisations are using compensation and rewards system as effective tools to develop, build and maintain “human capital” for competitive advantages by the following ways:

• Management of compensation aims at attracting qualified individuals to organisation.

• It helps in the retention of a competitive workforce in the organisation.

• It acts as an incentive for motivation of employees to put their best efforts in organisational development.

• It helps in minimisation of the cost of compensation thereby further adding to organisational effectiveness.

• Maintaining competitiveness in the market in order to control or decrease employee’s attention, which affects the organisational working.

• Encourages employees to develop their competencies.

• Compilation of social and legal legislations like The Minimum Wages Act, 1948, Companies Act 1956 etc.

You can understand the importance of compensation management by going through the example of Indian industries, which are aimed towards high growth and are in search for talented human resource. To achieve such an objective they are providing the most competitive packages.

Self-Assessment Questions -1

1. _______________Can be defined as the remuneration earned by an employee in return of his contribution to the organisation.

2. Compensation includes annual salary or hourly wages in combination with different benefits. (True/False)

3. Indirect compensation includes payment for _________ . Medical insurance Sick leave Basic pay Both (a) and (b)

3.Compemsation and non-compensation dimentions

Organisations design employee compensation packages based on some dimensions for its different employment units. These are explained below:

3.1 Compensation Dimensions

The compensation dimensions are described briefly as follows:

1. Pay for work and performance: This includes short-term monetary payments made on weekly, monthly and annual periods in form of awards or bonuses to allow employees to make payment for their desired product and services.

2. Pay for time not worked: It has been observed from past experience that the number of days worked per year and the number of hours worked per week have decreased. For past 40 years, the workers have taken the advantage of with-pay leaves, paid for time-off for personal reasons and for longer vacations, etc.

3. Disability income continuation: An employee becomes unable to perform his normal duties when he incurs some health or accident disabilities. Medical, surgical and hospital bills creates an additional burden for him in addition to his ongoing self and family expenditure. Example: Social security, sick leave, workmen compensation, etc. are example of the benefits that can help an employee in such situations.

4. Deferred income: Different types of programmes, like savings plans, social security, employer-provided pension plans, annuities, and supplemental income plans provide after retirement income to the employee. These are considered lucrative by them because of tax benefits like immediate tax deduction and deferment of tax obligation, etc. and help employees to earn tax-free interest.

Example: Stock purchase, option, and grant plans are components commonly used to achieve estate building, tax-deduction and deferral goals.

5. Spouse (family) income continuation: In compensation, there are some plans, which are designed to provide the dependents of the employee with income source in case of his death or permanent disability to work.

Example: Life Insurance plans, social security, pension plans, workers' compensation, and other related plans provide income to the families of employees in such situations.

6. Health, accident, and liability protection: At the time of health problems, employee’s main focus is not only concerned with income continuation but also associated with payments for medicinal treatments to overcome disability or illness. This is provided to them in the form of different insurance plans.

Example: Statistics show that in comparison to any other type of product or services the demand for health related product and services have highly increased.

7. Income equivalent payments: In addition to basic pay and allowances, the employees are provided with some additional benefits. These benefits are attached to their designation either in form of monetary or non-monetary incentives. This is usually referred to as perquisites or simply perks. Some perks are tax-free, in hands of employees and tax-deductible for employers.

8. Organisations develop compensation policy: The compensation system centres on sound principles of compensation administration.

3.2 Non-Monetary Compensation

Non-monetary compensation can equal 20 – 60% of the value of the cash compensation that an employee receives. For the current job seeker, starting salaries have barely increased, frozen or actually dropped. So, finding non-monetary benefits in an offer can be essential when an employee evaluates it. These added perks can sweeten (and seal) the deal. Beyond the employee getting material value from their benefits, there are non-material perks, as well. Companies who offer benefits, such as a rich retirement plan, send a message that they value their employees and want to promote long-term relationships with their employees. These employers are becoming more and more sought after.

There are a host of benefits that companies can offer to attract and retain top talent

• Flex-time schedules

• On-site childcare

• Free or discounted parking

• Free or discounted food and drinks

• Gym membership discounts

• In-office massage or yoga

• Casual Fridays

• Mentoring programs for career advancement

• Free or discounted educational and training opportunities

• Work opportunities in multiple locations

• Cross-training in other areas of the business

• Annual or quarterly company parties

3.3 Non-Compensation Dimensions

Non-financial compensation rewards can be defined as situation-related rewards though very important but not included in the compensation package. These are explained as below:

1. Enhance dignity and satisfaction from work performed: Recognition of an employee as valuable and useful contribution can be considered as one of the most powerful and least costly rewards. It motivates the feeling of self-worth and pride among employees in making contribution to the organisational success.

2. Enhance physiological health, intellectual growth, and emotional maturity: The organisation at time of designing its compensation policy must also consider the modern health practices. This recognises the direct relationship linking the physiological health and emotional and intellectual well-being of every individual employee.

3. Promote constructive social relationships with co-workers: In today’s world of extensive specialisation, the dependency of people has increased on one another. The opportunity to interact with other individuals in a socially productive manner to enjoy workplace association can be considered as one of the most valuable rewards gained from working.

4. Design jobs that require adequate attention and effort: Workers over past forty years, through their job designs, were taught how to perform quickly few highly repetitive tasks. The workers were made to perform these jobs for long for the time when they remained on job. Such an action, which initially appeared to be an effective way of melding workforce, turned to give serious drawbacks. Therefore, the firm must design the jobs in such a manner that it grabs adequate attention and efforts from workers.

5. Allocate sufficient resources to perform work assignments: An organisation opens doors for problems when it forces employees to perform those assignments for which they possess neither skills nor knowledge. Most of the employees seek a sense of achievement from their work. They are motivated by the degree of challenge to help them feel that they can succeed in handling such new assignments, so the organisation must provide them with adequate resources.

6. Grant sufficient control over the jobs to meet personal demands: Behavioural scientists over fifty years have felt the need for granting employees a greater opportunity to participate in the decision making process of organisation. The basic reason being that there are some employees in the organisation who rather being told what to do and what acceptable levels of performance to achieve, guide the top management on how to manage the organisation and its assignments more effectively.

7. Offer supportive leadership and management: This is considered as a dimension, which is almost difficult to separate from all other non-compensation ones. However, such a dimension is so important that it must be recognised as a unique dimension of the non-compensation rewards.

Self-Assessment Questions - 2

5. Pay for work and performance can be said to include money that is provided in long-term. (True/False)

6. Over the years, the number of days worked per year and number of hours worked per week have .

(a) Decreased (b)Increased (c)Remained unchanged (d)First decreased and then increased

7. Tax regulations and laws make------ more tempting to many employees.

8. rewards is the situation related rewards though important but not included in the compensation package of an organisation.

Activity 1

Critically analyse the compensation management system practiced in your organisation. Identify its strengths and weaknesses.

4. 3-P Concept in compensation management

The concept of paying for the 3-P’s, consists of three parameters that are considered by the management of any organisation while deciding the salary as well as the incentives of employees. It is to pay for the position, the person and the performance.

4.1 Pay For Position

With respect to pay for position, the crucial point of the policy of compensation is interpreted into the grade width. The grade width is the extent to which the various sizes are integrated within the same grade and thus, result in the reduction that lays emphasis on position.

Therefore, some factors such as individual’s competencies or skills or person’s achievement of goals laid greater impact on the total pay level instead of the grade level. A width of the grade not only identifies the importance of position to pay but also used to distinguish the importance of the different level of the firms and to arrange them in hierarchy.

Example: The insurance sector in India is providing the highest pay packages followed by Banking and IT sectors. In the year 2006, professional and technical skill oriented jobs provided a higher salary than senior management.

4.2 Pay For Person

In this approach, the second element of P is the “Person” which is regarded as one of the most subjective and essential part of the compensation management. It determines person’s experience and competencies which is both competitive and equitable in setting a salary structure. It is associated with the “competency based pay” and incorporates the approach of “market based pay.”

The very first stage in this approach is to determine the requirements of the position, which includes experience and competencies which the organisation required in the person for a particular position. Thus, the firm must look for such a procedure which assesses people and position within the structure of the organisation’s value, philosophy, identity and image against the same competency.

The key player between pay for person and pay for positions is the reference salary. This salary depends on the market competitive pay for the person who fulfils the needs of the position for experience and competency.

In the present day market scenario, it is the skills and the talents that matters the most. Companies are paying the least attention towards the sky-rocketing remunerations of the deserving employees.

Example: IIM graduates drawing huge packages and breaking their own records year after year is perhaps the biggest example of this.

4.3 Pay For Performance

The 3rd P of compensation management is pay for performance. The 3-P compensation management does not only give importance to performance of an individual in either setting of salary or providing increase in salary. It is based on the logic that since performance is variable and it fluctuates from year to year, the performance pay similarly is flexible and must fluctuate on similar patterns. In such an innovative form, the performance of an individual is managed through performance contract which consists of role clarification, objective setting and performance review. As a result of this contract of performance, the performance measurement at individual and corporate level becomes the basis for setting performance pay.

The purpose of pay for performance is to define the short and long-term incentive schemes and efficient rewarding of the employee’s contribution to its immediate and long-term results. An efficient scheme is one which is agreed-upon by all, is challenging, and is based on reasonable targets. It motivates the employee by relating targets to huge rewards, and which clearly and openly recognises the employee’s contribution.

Self-Assessment Questions - 3

9. A ______________ identifies the importance of position to pay.

10. Pay for person takes into account the experiences and capabilities in setting a pay level which is ____________ .

(e)Equitable

(f)Competitive

(g)Non-equitable and competent

(h) Both (a) and (b)

11. In pay for performance, only the individual performance is considered in setting remuneration or its increase. (True/False)

Activity 2

Suggest some Pay for Performance strategies for the Development officer of Life Insurance Corporation of India.

5.Compensation as retention strategy

As you know that in today’s competitive and dynamic environment, human resource management has to play a significant role in hiring and retaining right kind of employees. Among different strategies employed by organisation to retain its effective employees, one of the most critical one is measurement and reward of performance through compensation and other benefits.

Compensation system plays an integral role in retention of employees as a poor compensation is indeed one of the strong factors of employees leaving the organisation. A compensation system in an organisation can be linked to employees’ behaviour and attitude. An ineffective compensation strategy can result in poor job satisfaction and organisational identification which may further affect employee behaviours towards each other and the organisation.

As represented in table 1.3, ten studies conducted in past show that poor compensation stands as one of the major reasons for a higher employee turnover.

Table 1.3: Result of Study reflecting Reasons for Employee Turnover

Study Industry Findings:Turnover Due to Recommendations Carraher

et. al.

(2004) General Compensation Different compensation plans for high cognitive complexity jobs vs. low complexity jobs. Carroll&

Sturman

(2008) lodging Poor HR/hiring Review Pay and compensation from other industries to compare. Hire for skills and competencies to fit job description. Chickwe

(2009) Hospitality Compensation,poor HR Add incentive pay. Have a clear policy on recruitmen,retention, motivation, exit interview, and employee development.

Choi &

Dickson

(2010) Hospitality Poor HR Offer promotions, conduct exit interviews, have regular performance appraisals, have better training. Croes&

Tesone

(2007) lodging Compensation Communicate better on incentive programs, incentive plans for hourly workers, incentives

increased production and reduced turnover. Have better training.

Now you can say that by developing a right kind of retention strategy for employees, the organisation achieves success in retaining its employees during fluctuating economic periods.

A retention strategy, in addition to providing support to company’s vision and values, must also support compensation and benefit package. The firm must design the overall compensation policies and strategies.

Self-Assessment Questions - 4

12. plays an integral role in retention of employees in an organisation.

13. A compensation system in an organisation can be linked to employees’ behaviour and attitude. (True/False)

14. A retention strategy in addition to providing support to company’s vision and values must also support ____________ .

(1) Compensation

(2) Benefit package

(3)Both (a) and (b)

(4) Job description

15. Number the steps for Designing Compensation Strategy that are mentioned below

Number the steps:

A. Writing Job Description

B. Determining external pay equity

C. Focus on Strategic Objectives –

D. Ensuring Commitment

E. Designing Salary structure

F. Determining internal pay equity

G. Analysing Job Functions

6.Compensation for special groups

Censation systems though are similar for most but not for all kinds of jobs in the organisation. In every organisation, there are some special groups whose compensation is not determined in the same manner as it is done for majority of jobs in the organisation. This is simply because the compensation needs of such groups are greater than those of employees generally. The special group of employees includes executives, sales personnel and international employees. Now, you will understand them in brief:

6.1 Compensation Of Executives

Executive compensation attracted much of the attention in the area of compensation. It focuses on the size of monetary rewards earned by top executives like Chief Executive Officers (CEOs).

Example: If you talk about global market of America in the year 1996, the average salary of CEOs was 2.3 million dollars per year. After adding the incentives, stock options and other benefits, their compensation on an average rose to 5.8 million dollars.

Typically, the compensation of executives consists of basic pay, bonuses, stock option and other perquisites.

Organisations, at the time of designing compensation plans for executives, take into account the tax implications of providing such perks before incorporating them into the compensation system.

6.2 Compensation Of Sales Personnel

Compensation to sales personnel has remained one of the basic concerns in compensation payment to special groups which aims at providing sales personnel some kind of combination of basic pay and performance incentives. Sales compensation has been pointed out as an ideal form for using incentive plans as most of the sales personnel spend maximum of their time outside the organisation and control of the supervisor.

Different types of compensation incentives can be designed out for sales personnel like:

1. Straight commission compensation plan: It helps an organisation to attract and retain result oriented sales personnel giving consideration to high earning potential and freedom of action. Moreover, it also encourages aggressive selling which is the demand of current industry.

2. Salary plus performance bonus: In this, the sales personnel receives fixed salary and also additional amount for achieving the sales target at the end of the sales period on monthly, quarterly and yearly basis.

Therefore, at the time of selecting a suitable compensation policy for sales personnel, the firm must take into account its organisational strategy, competitors’ compensation practices and the products and services offered by firm for sale.

The firm must first design the process of compensation such that it includes elements like payout mechanics, payout frequency, pay mix, incentive form, etc. Second, this design process should take into consideration the organisational strategy, job roles and competitive pay levels. Finally sales rewards should be tied to organisational goal setting.

6.3 Compensation For International Employees

Globalisation has resulted in creation of an internationally equitable system of compensation for the firms operating in multinational environment. Firms operating in such environment involve three basic kinds of employees known as Expatriates, Local-Country Nationals (LCNs) and Third-Country Nationals (TCNs).

1. Expatriates: These individuals, also termed as expats, are the citizens of a country in which headquarters of an organisation are situated.

Example: An Indian working in an Indian Subsidiary company in Thailand is an expatriate.

2. Local-country nationals: LCNs are citizens of the country in which the subsidiary or branch of parent company is located.

Example: A Mexican working for a U.S company in its Cabo San Lucas branch.

3. Third-country nationals: TCNs are individuals who are in the process of applying visas to move to the countries which are not their country of origin.

A number of benefits are provided to all three categories of people. The compensation system of an organisation aims at providing them the benefits which keep them in identical economic condition as they were in, before accepting an overseas project and to positive aspect of living in a foreign country.

Various incentives are provided to expatriates starting from cash bonuses to stock options and performance related incentive payments.

Self-Assessment Questions - 5

16. focuses on the size of monetary rewards

earned by top executives like Chief Executive Officers for product standardisation.

17. Sales compensation has been pointed out as an ideal form for using incentive plans. (True/False)

18. are the citizen of a country in which headquarters of an organisation are situated.

(a)Expatriates (b)LCNs

(d) NRIs

7. Significant compensation issues

Just as HR activities strive in a dynamic environment, compensation management also operates in this environment.

When managers aim to reward their employees in a fair manner they must also take into consideration certain critical issues like labour cost control, legal issues relating to male and female wage payments and concerns relating internal pay equity.

Therefore, you can say that the major or significant issues relating to compensation in an organisation are:

Equal pay for comparable worth

This issue has risen from the fact that the jobs which are performed by women employee are less paid in comparison to the jobs which are performed by men. Such a practice in criticism is termed as institutionalised Sex discrimination.

Example: A female receptionist is paid less than a male receptionist in spite of the fact that both may be contributing equally to the organisation success.

Low salary budgets

You can simply say that while current inflation trends have been stable making employees realise the real worth of their gain in earnings which seems to be quite smaller in comparison to earlier years. The tight compensation cost control resulted from global job competition, reduction in use of manpower due to introduction of new technology and increasing utilisation of part-time and temporary workers receiving lower wages and benefits have all resulted in low salary budgets of the company.

Example: Though the employees did not have a tough time but still the reports of “WorldatWork” shows that the increase in the size of salaries has been comparatively more before 1990.

Wage Rate Compression

The issue of low salary budget as discussed above can be rooted to the compensation problem known as pay compression. A compression in wage rate takes place when less experienced junior employees earn comparatively more than the employees who are experienced. This can be attributed to the sole reason that such inexperienced employees are paid more due to higher starting salaries.

Example: Due to lack of availability or supply of well-qualified applicants in field of engineering, computers and other technical and professional fields, they are offered higher salary packages in comparison to senior and experienced employees.

Another reason accountable to pay compression can be stated as the slightly lower salaries earned by employees at the top of pay grades in comparison to the managers at the low end of their pay grades.

Identification of compression of wage rate and its causes is quite simple f in comparison to implementation of policies aimed at reducing its effect.

Therefore, you can say that pay compression problem should be well addressed as it can cause low morale among employees. This may result in reduction in their performance, a higher turnover and absenteeism rate, and emergence of an immoral behaviour of employee such as theft, etc.

Self assessment questions - 6

19. One of the most important issues in compensation management can be considered as equal pay for comparable worth. (True/False)

20. World at Work reports shows that the increase in the sizes of salary have been comparatively _____________ before 1990.

(e) More

(f)Less

(g) Constant

(h)Either (a) or (b)

21. takes place when less experienced junior employees earn comparatively more than the employees who are experienced.

8.Summary

Let us recapitulate the important concepts discussed in this unit:

•Compensation in its simplest form is referred to as the payment that one gets for the work done by him either on full time or par time basis.

• Pay for work and performance, pay for time not worked, disability income continuation, spouse (family) income continuation, income equivalent payments, and organisations develop compensation policy are some of the important compensation dimensions.

• Non-financial compensation rewards can be defined as situation-related rewards though very important but not included in the compensation package. • The concept of paying for the 3-P’s consists of three parameters that are considered by the management of any organisation

• Compensation system plays an integral role in retention of employees.

• In every organisation there are some special groups whose compensation is not determined in the same manner as it is done for majority of jobs in the organisation.

• Equal pay for comparable worth, low salary budgets and wage rate compression are some of the significant issues of compensation management.

9. Glossary

Base pay: Fixed salary or wage constituting the fixed basic rate for the job.

Benefits: This includes sick pay, pensions, company car, insurance cover and other perquisites.

Compensation: It includes every kind of financial return and tangible benefits and services which workers receive as part of their employment relationship with employer.

Incentive: The additional form of compensation that is directly linked with performance and paid over and above the standard pay.

Salary: The payment to managers and professionals who generally fit this category, where the pay is calculated at an annual or monthly rate rather than hourly rate.

Variable pay: Variable pay can be defined as a non-traditional compensation method which is performance-based.

Wage: It is the payment to workers who get either daily or hourly payment.

10.terminal questions

1. Explain the concept of compensation. What are its components?

2. What are the different types of compensation dimensions? Discuss in brief. 3. Do you think only non-compensation dimensions are of any use? Explain stating examples.

4. Define the 3-P concept of compensation management.

5. Critically comment on the statement, “Compensation is a significant employee retention strategy”.

6. “In every organisation, there are some special groups whose compensation is not determined in the same manner as it is done for majority of jobs in the organisation”. List the various special groups of employees. Explain the compensation for these special groups.

7. What do you think are the significant compensation issues that you would like to address as a manager while designing compensation strategy in your organisation.

11. Answers

Self Assessment Questions

1. Compensation

2. True 3. Both (a) and (b)

(3) Conduct job analysis

(4) Select Compensable factors

(8) Analyse salary structure

4. False

5. (a) Decreased

6. Deferred income plans

7. Non-financial compensation

8. Width of the grade

9. Both (a) and (b)

10. False

11. Compensation system

12. True

13. (c) Both (a) and (b)

14. A-4; B- 6; C- 1; D-2; E- 7; F- 5; G- 3

15. Executive compensation

16. True

17. (a) Expatriates

18. True

19. More

20. Pay compression

Terminal Questions

1. Compensation management refers to payment system which determines employee wage or salary, direct or indirect rewards. For more details, refer to section 2.

2. Compensation dimensions include pay for work, pay for time not worked, etc. For more details, refer to section 3.

3. Non-financial compensation rewards are all situation-related rewards. For more details, refer to section 3.

4. Pay for the position, the person and the performance are the three parameters that are considered by the management of any organisation. For more details, refer to section 4.

5. Compensation system plays an integral role in retention of employees as a poor compensation is indeed one of the strong factors of employees leaving the organisation. For more details, refer to section 5.

6. The special group of employees includes executives, sales personnel and international employees. For more details, refer to section 6.

7. Equal pay for comparable worth, low salary budgets and wage rate compression are some of the significant issues of compensation management. For more details, refer to section 7. 12. Case study

Salary Inequities at Acme Manufacturing

Joe Black was trying to figure out what to do about a problem salary situation he had in his plant. Black recently took over as president of Acme Manufacturing. The founder and former president, Bill George, had been president for 35 years. The company was family owned and located in a small eastern Arkansas town. It had approximately 250 employees and was the largest employer in the community. Black was the member of the family that owned Acme, but he had never worked for the company prior to becoming the president. He had an MBA and a law degree, plus five years of management experience with a large manufacturing organisation, where he was senior vice president for nhuman resources before making his move to Acme.

A short time after joining Acme, Black started to notice that there was considerable inequity in the pay structure for salaried employees. A discussion with the human resources director led him to believe that salaried employees pay was very much a matter of individual bargaining with the past president. Hourly paid factory employees were not part of this problem because they were unionised and their wages were set by collective bargaining. An examination of the salaried payroll showed that there were 25 employees, ranging in pay from that of the president to that of the receptionist. A closer examination showed that 14 of the salaried employees were female. Three of these were front-line factory supervisors and one was the human resources director. The other 10 were non management.

This examination also showed that the human resources director appeared to be underpaid, and that the three female supervisors were paid somewhat less than any of the male supervisors. However, there were no similar supervisory jobs in which there were both male and female job incumbents. When asked, the HR director said she thought the female supervisors may have been paid at a lower rate mainly because they were women, and perhaps George, the former president, did not think that women needed as much money because they had working husbands. However, she added she personally thought that they were paid less because they supervised less-skilled employees than did the male supervisors. Black was not sure that this was true.

The company from which Black had moved had a good job evaluation system. Although he was thoroughly familiar with and capable in this compensation tool, Black did not have time to make a job evaluation study at Acme. Therefore, he decided to hire a compensation consultant from a nearby university to help him. Together, they decided that all 25 salaried jobs should be in the same job evaluation cluster, that a modified ranking method of job evaluation should be used, and that the job descriptions recently completed by the HR director were current, accurate, and usable in the study.

The job evaluation showed that the HR director and the three female supervisors were being underpaid relative to comparable male salaried employees.

Black was not sure what to do. He knew that if the underpaid female supervisors took the case to the local EEOC office, the company could be found guilty of sex discrimination and then have to pay considerable back wages. He was afraid that if he gave these women an immediate salary increase large enough to bring them up to where they should be, the male supervisors would be upset and the female supervisors might comprehend the total situation and want back pay. The HR director told Black that the female supervisors had never complained about pay differences. The HR director agreed to take a sizable salary increase with no back pay, so this part of the problem was solved. Black believed he had for choices relative to the female supervisors:

1. To do nothing.

2. To gradually increase the female supervisors salaries.

3. To increase their salaries immediately.

4. To call the three supervisors into his office, discuss the situation with them, and jointly decide what to do.

Questions

1. What would you do if you were Black?

2. How do you think the company got into a situation like this in the first place?

3. Why would you suggest Black pursue the alternative you suggested

Source: http://www.chrmglobal.com/Replies/3544/1/Case-study Compensation-andReward-Management.html

References:

• Armstrong, M. (2006). Handbook of Human Resource Management, Kogan Page, 10th Edition.

• Milkovich G. T. & Newman J. M. (2005). Compensation Management. Tata McGraw Hill.

• Robinson, S. L. & Rousseau, D. M. (1994) "Violating the psychological contract: Not the exception but the norm" Journal of Organisational Behavior 15, pp 245-259.

• Singh, B. D. (2007), Compensation and Reward Management, Excel Books Pvt Ltd.

• Soni, Shyam Singh (2008), Compensation Management, Excel Books Pvt Ltd.

E-References:

• http://www.citehr.com/68382-what-definition-compensation management.html, Retrieved on 11th July 2012, Time: 10:09 AM

• http://www.scribd.com/doc/8579074/compensation-Management, Retrieved on 11th July 2012, 10:10 AM

• http://books.google.co.in/books?id=, Retrieved on 11th July 2012, Time: 4:05 PM

• http://www.ehow.com/info_7924255_compensation-affect-employee-retention.html, Retrieved on 12th July 2012, Time: 12:37 PM

• http://entrcommunicators.blogspot.in/2011/08/compensation-system-vsemployee.html, Retrieved on 12th July 2012, Time: 12:44 PM

• http://suite101.com/article/understanding-compensation-for-special-employmentgroups-a405646, Retrieved on 12th July 2012, Time: 4:12 PM

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