COMPENSATION & PAY MODEL

COMPENSATION

What is Compensation ? What Importance it has ? Stake holders Various forms of Compensation

CONTRASTING PERSPECTIVES OF COMPENSATION

COMPENSATION: DEFINITION

Society
Pay

as a measure of justice Benefits as a reflection of justice in society Job losses (or gains) attributed to differences in compensation Belief that pay increases lead to price increases

Stockholders
Using

stock to pay employees creates a sense of ownership Linking executive pay to company performance supposedly increases stockholders' returns

Managers
A

major expense Used to influence employee behaviors and to improve the organization's performance

COMPENSATION: DEFINITION (CONT.)

Employees Major source of financial security Return in an exchange between employer

and themselves Entitlement for being an employee of the company Reward for a job well done

Global Views Vive la diffrence China: Traditional meaning of

compensation providing necessities of life replaced with dai yu Japan: Traditional word kyuyo replaced with hou-syu; very recently the phrase used is teate

WHAT IS COMPENSATION?

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship

CURRENT CHALLENGES
One of the greatest challenges companies facing today is retaining top talent. The expense to an organisation of replacing an employee (including separation, replacement, training and lost performance costs) can be as much as that employees salary for a year. Turnover further erodes morale among those who stay and harms customer retention.

REWARD TRENDS

From Narrowly-defined jobs and job standards Inflexible jobevaluation systems sizing tasks, rewarding nonadaptive behaviour and empire-building, encouraging pointgrabbing

To

Broad, generic roles -emphasis on competence and continuous development Flexible job evaluation processes assessing the value added by people in roles, often within job families

REWARD TRENDS (CONT.)

From Hierarchical and rigid pay structures - only way to get on, is to move up. Focus on next promotion.

Emphasis on individual performance-related pay (PRP) Consolidation of rewards into base pay

To Broad-banded and job family pay structures emphasising flexibility, career development pay and continuous improvement. Focus on next challenge.

More focus on team performance, team-based pay; contribution-related pay More emphasis on at risk pay

iscussion

ransactional Returns elational Returns

What are the Kind of Returns , Employee Gets from the Organization -Total Compensation - Cash Compensation - Benefits

-Relational Returns

FRAMEWORK FOR ANALYZING DIFFERENT DEALS

HIGH PAY LOW COMMITMENT Hired Guns (Stockbrokers) HIGH PAY HIGH COMMITMENT Cult - like (Microsoft)

TRANSACTIONAL

High

LOW PAY LOW COMMITMENT Workers as Commodity (Employers of Migrant Farm Workers)

LOW PAY HIGH COMMITMENT Family (Starbucks)

Low

Low

RELATIONAL

High

: TOTAL RETURNS FOR WORK

FORMS OF PAY

Relational returns
Psychological

in nature

Total compensation
Cash

Compensation/ transactional

Base wages

Difference between wage and salary

Merit pay/cost-of-living adjustments

Merit increases given in recognition of past work behavior Cost-of-living adjustments same increases to everyone, regardless of performance

FORMS OF PAY (CONT.)

Cash Compensation/ transactional (cont.) Incentives/ Variable pay tie pay increases directly to performance Does not increase base wage; must be re earned each pay period Potential size generally known beforehand Long-term (stock options), and short-term

Benefits Income protection Work/life balance Allowances

FORMS OF PAY (CONT.)

Total earnings opportunities: Present value of a stream of earnings

Shifts

comparison of today's initial offers to consideration of future bonuses, merit increases, and promotions returns

Relational returns from work

Nonfinancial

Organization as a network of returns

Created

by different forms of pay, including total compensation and relational returns

A PAY MODEL

Three basic building blocks:

Compensation Policies

objectives

that form the foundation of the compensation system that make up the compensation

Techniques

system

: THE PAY MODEL

COMPENSATION OBJECTIVES (CONT.)

Efficiency
Improving

performance, increasing quality, delighting customers and stockholders Controlling labor costs

Fairness
Fundamental objective of pay systems Fair treatment by recognizing both employee

contributions, and employee needs

Procedural fairness

COMPENSATION OBJECTIVES (CONT.)

Compliance
Conformance

to Government and State compensation laws and regulations

Ethics
Organizations

achieved

care about how its results are

Objectives
Guide

the design of the pay system Serve as the standards for judging success of the pay system Policies and techniques are means to reach objectives

Suggest . Your Thoughts on .

Objectives of Compensation System

FOUR POLICY CHOICES

Internal Focus Pay

alignment

- Comparisons among jobs or skill levels inside a single organization relationships within an organization affect employee decisions to:
Stay with the organization Become more flexible by investing in additional training Seek greater responsibility

External Focus Pay

competitiveness

- Compensation relationships external to the organization: comparison with competitors is market driven

FOUR POLICY CHOICES (CONT.)

External
Effects

of decisions regarding how much and what forms:

competitiveness (cont.)

Employee
Focus

To ensure that pay is sufficient to attract and retain employees To control labor costs to ensure competitive pricing of products/ services

- Relation emphasis placed on employee performance

Performance based pay affects fairness

contributions

Management
Focus

- Policies ensuring the right people get the right pay for achieving the right objectives in the right way

REWARD MANAGEMENT
Definition:

RM is concerned with the formulation and implementation of strategies and policies that aim to reward employees fairly, equitably and consistently in accordance with their value to the organisation (Armstrong, 2003). aims: to develop and implement the reward policies, processes and practices required to support the achievement of the organisations goals by helping to ensure that it has the skilled, competent, well motivated and committed people it needs.

Strategic

total reward defined- Michael Armstrong

Total reward includes all types of reward non-financial as well as financial, indirect as well as direct, intrinsic as well as intrinsic. It is a value proposition which embraces everything that people value in the employment relationship and is developed and implemented as an integrated and coherent whole.

rationale for total reward

Creating a fun, challenging, and empowered work environment in which individuals are able to use their abilities to do meaningful jobs for which they are shown appreciation is likely to be a more certain way to enhance motivation and performance even though creating such an environment may be more difficult and take more time than simply turning the reward lever. Jeffrey Pfeffer Stanford University

Characteristics of a total reward strategy (CIPD)

Holistic - focuses on how organisations attract, retain and motivate employees to contribute to success using an array of financial and non-financial rewards. Best fit tailored to the organisations culture and work processes. Integrative the reward system is integrated with HR policies and practices. Strategic aligns reward and business strategies. People centred - focuses on employee needs and wants. Customised provides a flexible mix of reward that offers choice. Distinctive - uses rewards to create a distinctive

models of total reward

total reward (engaged performance) model Hay Group

quality of work tangible rewards engaged performance work/life balance

future growth/opportunit y

inspiration/values

enabling environment

total reward model - WorldatWork

Total rewards are all the tools available to the employer that may be used to attract, motivate and retain employees. Total rewards include everything the employee perceives to be of value resulting from the employment relationship

organisational culture business strategy HR strategy

total rewards strategy compensation benefits work/life performance and recognition development and career opportunities

attract motivate retain

employee satisfaction and engagement

business performance and results

total reward model Watson Wyatt

business strategy human capital strategy

total reward strategy

fixed reward costs fixed costs of employment value of role to organization performance-based rewards variable costs of employment contribution made by individual environment-based rewards intrinsic rewards employment deal

effective delivery through focused communication, greater flexibility and use of technology

total reward model - Towers Perrin

TRANSACTIONAL (TANGIBLE)

PAY/REWARD
base pay

BENEFITS pensions perks flexible benefits WORK ENVIRONMENT core values leadership employee voice job/work design health care

contribution pay shares/profit sharing recognition LEARNING AND DEVELOPMENT workplace learning training performance management career development

RELATIONAL (INTANGIBLE)

COMMUNAL

INDIVIDUAL

total reward model

- Michael Armstrong

base pay transactional rewards contingent pay employee benefits total reward learning and development relational rewards the work experience recognition, achievement, growth non-financial rewards total remuneration

conduct diagnostic review monitor and evaluate making total reward happen

define objectives

communica te

develop approach
(involve)

(encourage/guide)

implement progressively

prioritise design