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S Compensation 6

The document discusses compensation strategies and the importance of compensation. It covers determining compensation relative to the market, balancing fixed and variable pay, and developing cost-effective compensation programs. It also discusses different types of compensation equity and frameworks for compensation policies.

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Chandan Verma
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33 views19 pages

S Compensation 6

The document discusses compensation strategies and the importance of compensation. It covers determining compensation relative to the market, balancing fixed and variable pay, and developing cost-effective compensation programs. It also discusses different types of compensation equity and frameworks for compensation policies.

Uploaded by

Chandan Verma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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COMPENSATION STRATEGIES

• What are the main decisions that have to be taken at strategic


level related to compensation system
• What are the main types of compensation strategies available
• What are the principles that need to be kept in mind for
planning a compensation strategy for a long term and at
different levels
KEY STRATEGIC ISSUES IN COMPENSATION

• Determining compensation relative to market


• Balance between fixed & variable compensation
• Deciding whether or not to utilize team-based versus
individual pay
• Creating appropriate mix of financial & non-financial
compensation
• Developing cost-effective compensation program resulting in
high performance
IMPORTANCE OF COMPENSATION

• Impacts employer’s ability to attract & retain employees


• Ensure optimal levels of employee performance in meeting
organization’s strategic objectives
• Compensation’s components
• Direct compensation in wages or salary
• Base pay (hourly, weekly, monthly)
• Incentives (sales bonuses &/or commissions)
• Indirect compensation in form of benefits
• Legally required benefits (e.g., Social Security)
• Optional (e.g., group health benefits)
EXHIBIT 11-1
COMPENSATION SYSTEM
INTERNAL EQUITY

• Fairness of pay differentials between


different jobs in organization
• Established by job ranking, job
classification, point systems or
factor comparisons
EXTERNAL EQUITY

• Fairness of organizational compensation


levels relative to external compensation
• Assessed by collecting wage & salary
information to guide in setting
organization’s pay strategy to lead, meet
or lag labor market wages
INDIVIDUAL EQUITY

• Fairness about pay differentials among individuals in same job


• Established by using
• Seniority-based pay systems: Reward longevity
• Merit-based pay systems: Reward employee performance
• Incentive plans: Employees receive part of compensation based on performance
• Skills-based pay systems: Compensation based on employees possessing skills
that firm values
• Team-based pay plans: Encourage cooperation & flexibility
EXHIBIT 11-2
EQUITY THEORY
EXHIBIT 11-3
EQUITY & WORK-RELATED OUTCOMES
Exhibit 11-4
Classification System –
Federal Government
EXHIBIT 11-4
POINT SYSTEM
METHOD
EXHIBIT 11-7
COMPARISON OF JOB EVALUATION METHODS
FRAMING THE POLICY : EXTERNAL EQUITY

• Collect wage & salary information to


determine market wage rates
• Also consider other forms of compensation
• Determine pay strategy relative to market
FRAMING THE POLICY : EXTERNAL EQUITY

• Lag policy • Market policy


• Lower wages than • Wages equal to
competitors, compensates competitors
employees through other • Neutralizes pay as factor
means
• Opportunity for
• Lead policy
advancement • Higher wages than
• Incentive plans competitors to ensure
• Good location organization becomes
• Good working conditions employer of choice
• Employment security
FRAMING THE POLICY : INDIVIDUAL
EQUITY
• Basing pay on seniority
• Merit pay systems
• Incentive pay
• Returns financial rewards to employees responsible for creating them
• Allows organizations to adjust compensation expenses based on organization
performance
• Variety of forms
• Tied to employee’s, work unit’s, or organization’s results
FRAMING THE POLICY : INDIVIDUAL
EQUITY

• Skill-based pay systems


• Base compensation on acquisition & mastery of skills
• Give employees incentives to learn
• Promote flexibility
• Easily linked with training programs & strategic needs
INDIVIDUAL EQUITY

• Team-based pay plans


• Can be less time-consuming than administering individual reward systems
• May impact group dynamics
• Can adversely impact & intensify conflict
• Need decentralized decision-making system
• Need high level of communication with employees
• Employees should have voice & provide input into design
• Team members need to feel system is fair & equitable
EXECUTIVE COMPENSATION

• No real average or standard


• Typical annual compensation for senior
executives
• 20% salary
• 30% annual incentives
• 50% long-term incentives
EXECUTIVE COMPENSATION

• Stock Grants
• Require organization meet specific financial goals
• Stock Options
• Provide opportunity to purchase shares at some future date, at price determined
when options are awarded
• Focus employee attention on creating shareholder value
• Do not have to be reported as expenses
• Can create culture obsessed with improving stock performance at expense of
other concerns
• Can prompt executives to engage in creative accounting practices

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