Chapter 6 Compensation Management PDF

BSHR2101/Fundamentals of Human Resource Management Chapter 6: Compensation Management Learning Objectives Definition of compensation Goals and objective of compensation Basics of Compensation Program The Elements of Compensation Theories Related to Compensation Performance pay or Lon...

BSHR2101/Fundamentals of Human Resource Management Chapter 6: Compensation Management Learning Objectives Definition of compensation Goals and objective of compensation Basics of Compensation Program The Elements of Compensation Theories Related to Compensation Performance pay or Longevity pay Skill-Based or Competency-Based Pay  Introduction The single most important thing to be said about compensation is that it is an integral part of human resources management The methods of compensation reflects visibly in the policy and Management style of an organization Quality work in compensation should contribute significantly to the success of the business Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  Cont. A compensation system is used to focus worker attention on the specific efforts the organization considers necessary to achieve its desired goals Compensation also affects the process of both attracting and retaining employees Pay is now identified by employees as the top reason for job satisfaction Lussier N. Robert and Hendon R John, J. (2013). Fundamental of Human Resource Management Functions, application and skill development. London: Sage Publication.  Compensation Definition Compensation refers to monetary payment given to an individual in exchange for their services. In the workplace, compensation is what is earned by employees. It includes salary or wages in addition to commission and any incentives or perks that come with the given employee's position. Compensation can also be money, a payment meant to give someone a fair exchange for their effort and output. Lussier N. Robert and Hendon R John, J. (2013). Fundamental of Human Resource Management Functions, application and skill development. London: Sage Publication.  Objectives of compensation 1. Acquire Qualified Personnel. 2. Retain Present Employees 3. To Boost Motivation 4. Comply with Legal Regulations 5. Ensure Equity Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  The Basics of a Compensation Program 1. Serve All Stakeholders 2. Keep It Simple 3. Start by Identifying Compensation Needs 4. Group Employees Properly 5. Have a Proper Process for Developing Compensation Programs 6. Program Design Must Reflect Company Culture Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  1.Serve All Stakeholders Compensation pay decisions helps to resolve pay problems in an effective and efficient manner, consistent with the interests of all participants in the enterprise Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  2.Keep It Simple Compensation facilitate the achievement of reasonable employee goals and balance the interests of all the participants in the enterprise. But it should be as simple as possible. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  3.Start by Identifying Compensation Needs Needs vary from company to company, based on company operations and management EX, technology companies may offer higher salaries to attract skilled software engineers, while non-profits may focus more on benefits and work-life balance due to budget constraints. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  4.Group Employees Properly Different types of jobs may require different types of pay programs and practices Ex, Sales Positions: Example: A company might offer a base salary plus commissions based on sales performance. This incentivizes sales representatives to exceed targets and drive revenue. Technical Roles: Pay Program: Competitive Salary with Skill-Based Pay Example: A software engineer may receive a high starting salary with additional pay for specialized skills or certifications, reflecting the demand for technical expertise in the market. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  5.Have a Proper Process for Developing Compensation Programs Always start with organization needs; never start with programs When developing compensation programs, it's essential to begin with the organization’s needs rather than jumping straight into specific programs. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  The elements of compensation may be categorized as following Salary Nonfinancial Premium rewards payments Extra pay Bonus plans payments Long term Benefits income payments Pay for time not worked Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  1.Salaries or Wages Salaries or wages are periodic payments to employees. For the company, they represent a fixed cost of doing business Example, Newly recruited employee is offered OMR 325 Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  2.Premium Payments For most operations level employees, overtime pay is legally required. As a matter of policy or collective bargaining, many companies have enriched the rate of payments for work beyond standard work weeks Example, employee paid overtime for extra working hours during holidays Consider a retail employee whose standard workweek is 40 hours. If this employee works an extra 8 hours on a holiday, they are entitled to overtime pay. While the law may require them to receive 1.5 times their regular hourly wage for those extra hours, the company might have a policy that pays double time for holiday work. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live Example Regular Hourly Wage: $20 Overtime Rate: $20 × 1.5 = $30 (legally required) Company Holiday Rate: $20 × 2 = $40 (company policy) In this scenario, if the employee works 8 extra hours on a holiday, they would earn $320 for those hours ($40 × 8 hours) instead of the $240 they would receive at the standard overtime rate. This policy not only complies with legal requirements but also incentivizes employees to work during busy holiday periods  3.Bonuses Bonuses involve periodic lump sum payments. They may be annual payments, such as those under an annual incentive award plan for managers, or bonus or commission payments to salespersons, which would more likely be made monthly. Bonuses represent a variable cost. Firms believe that some types of bonuses contribute substantially to improving operations by providing financial motivation. Example, Bonus paid for extra hours or achieving above expectation Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  4.Long Term Income Payments Bonuses paid for achieving goals or standards over a period, which Example: Consider a sales manager at a technology company who has a target to increase sales by 20% over three years. If the manager meets or exceeds this goal by the end of the three-year period, they may receive a long-term bonus as part of their compensation package. Performance Goal: Achieve a 20% increase in sales over three years. Bonus Amount: $30,000, payable at the end of the three years. In this case, the long-term bonus serves as an incentive for the sales manager to focus on strategic growth initiatives, customer relationships, and team performance over the entire three-year period, rather than just short-term gains. This approach aligns the manager's interests with the company’s long-term success and encourages retention. h is longer than one year. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  5.Pay for Time Not Worked Pay for time not worked. Examples vacation time, holidays, sick leave days, and military service ay for Time Not Worked: Examples Examples: 1.Vacation Time: 1. An employee is entitled to 15 paid vacation days per year. If they take a week off (5 days) for vacation, they receive their regular salary for those days, even though they are not working. 2.Holidays: 1. A company observes public holidays, such as New Year's Day and Independence Day. If an employee normally works on these days, they receive their regular pay for these holidays, regardless of whether they work. 3.Sick Leave: 1. An employee falls ill and takes 3 days of paid sick leave. During this time, they will receive their usual salary for those days, ensuring they do not lose income due to their health condition. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  6.Benefits Employee benefits provide protection against economic risks. Example, including death, disability, and illness Examples:.Death: Life Insurance: If an employee passes away, their beneficiaries receive a death benefit from the employer's life insurance policy, providing financial support during a difficult time. Disability: Disability Insurance: If an employee becomes disabled and cannot work, long-term disability insurance provides a portion of their salary, helping them manage living expenses while they recover. Illness: Health Insurance: If an employee falls ill and requires medical treatment, health insurance covers a significant portion of their medical expenses, reducing their financial burden related to healthcare costs. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  7.Extra Pay Plans Extra pay programs include stock purchase plans and some forms of profit sharing trusts Examples, offering stocks to employees. Examples: 1.Stock Purchase Plans: 1. Example: A company offers an Employee Stock Purchase Plan (ESPP) where employees can buy company stock at a discounted rate, typically 10-15% below market value. For instance, if the stock is valued at $100, employees can purchase it for $85. This incentivizes employees to invest in the company and aligns their interests with its long-term success. 2.Profit Sharing: 1. Example: A company implements a profit-sharing plan where a percentage of annual profits is distributed among employees based on their salary or tenure. If the company earns $1 million in profit and has a profit-sharing pool of $100,000, eligible employees might receive a bonus based on their contribution to the company's performance. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 2, 2022. https://search-ebscohost- com.masader.idm.oclc.org/login.aspx?direct=true&db=nlebk&AN=440&site=ehost-live  Nonfinancial Elements of Pay Nonfinancial renumeration should be integral part of management compensation: Example of nonfinancial reward. The Work: Example: Providingmeaningful and challenging tasks that align with employees' skills and interests. For instance, a project manager might be given the opportunity to lead an innovative project, enhancing job satisfaction and engagement. Physical conditions Example: Ensuring a safe and comfortable workspace. An office that offers ergonomic furniture, adequate lighting, and cleanliness can improve employee well-being and productivity. Work environment Example: Fostering a positive and collaborative work culture. For instance, team-building activities and open communication practices can create a supportive environment where employees feel valued and connected. Sibson RE. Compensation. Vol 5th ed. AMACOM; 1990. Accessed October 5, 2022. https://search- ebscohost-com.masader.idm.oclc.org/login.aspx?direct=true&db=e000xww&AN=440&site=eds-live  Perquisites of the Job: Example: Offeringflexible work arrangements, such as remote work options or flexible hours. This flexibility allows employees to balance their personal and professional lives more effectively, leading to higher job satisfaction. Fairness: Example: Ensuring equitable treatment and opportunities for all employees. Implementing transparent performance evaluation processes helps employees feel that their contributions are recognized fairly, promoting trust and loyalty within the organization.