Compensation Components and Theories PDF

**Compensation Components** **and Theories** **COMPENSATION** - is a systematic approach to providing monetary value to employees in exchange for work performed. - It is a tool used by management for a variety of determinations to advance the life of the company.. **Salary** - is...

**Compensation Components** **and Theories** **COMPENSATION** - is a systematic approach to providing monetary value to employees in exchange for work performed. - It is a tool used by management for a variety of determinations to advance the life of the company.. **Salary** - is a consistent payment by an employer to an employee based on a specific position\'s work. **Wages** - a fixed regular payment, typically paid on a daily or weekly basis. **CONCEPT OF COMPENSATION** 1. **Individual worth** - value of an individual to perform that job may vary according to his/her skill/knowledge, expertise and more so his behavior on the job and with associated persons. 2. **Level to Company** - the employer's intention is to make aware the employees that he/she must ensure return on this investment through his/her consistent and continuous performance. 3. **Flexible Compensation Package** - Employees are being offered compensation structure with numbers of benefits to choose. **TYPES OF COMPENSATION** 1. **Direct Compensation** - is a financial (or monetary) form. 2. **Indirect Compensation** - is often known as employee benefits or perks of the job. **Different types of Compensation-Theories** **Classical Theory** - It concentrated on job content and **management of physical resources** Adam Smith's Wealth of Nations published in 1776 is considered to mark the beginning of Classical Economics. **Neo Classical Theory** - are inclined to contend that pay levels are always tending towards equality. **Equity Theory** - focuses on the fairness of the compensation system. **Porter-Lowler Theory -** - states the perceived value of reward is determined by both intrinsic and extrinsic rewards that result in need satisfaction. **Vroom Expectancy Theory** - - emphasizes some complexities of motivation. This theory is based on the premise that felt need s cause human behavior. **Reinforcement Theory -** - focuses on the consequences of actions rather than the underlying needs or preferences **EMPLOYEE COMPENSATION** Compensation refers to the payment received by an employee from an employer, including salary, wages, benefits, and variable pay. Compensation can also refer to money paid for losses or damages, such as workers \' compensation for injured workers. The word \" compensation \" comes from the Latin verb \" compensare, \" which means \"to weigh against.\" **TYPES OF EMPLOYEE COMPENSATION** 1. **SALARY** - is a fixed regular payment that an employer gives to his/her employees in a weekly, bi-monthly or monthly basis. 2. **HOURLY WAGES** - This is the amount received by the employee at an hourly rate for each hour she/he works **3. SALES COMMISSION** - This is the amount of money that an employee receives upon selling company products, This is in addition to his/her standard salary. **4. TIPS OR TIP INCOME** - **also called gratuity** which means a sum of money that is given to a worker for the services he/she has rendered. **5. STOCK OPTIONS** - Employee stock options (ESOs) are a type of equity compensation granted by companies to their employees and executives. **6. INCENTIVE PAY** - An incentive pay is used to encourage the employees to achieve a higher standard. **7. BONUSES** - Bonuses are compensations given by the company in addition to the salary of hourly wages of employees. 8. **OVERTIME PAY** - An overtime pay is the amount of money that is paid to the employees for working beyond their scheduled regular working hours **9. BENEFITS** - These refer to payments or gifts made by an employer for the welfare of his/her employees. **10. NONMONETARY COMPENSATION** - This refers to recognition, meals, flex-time, time off, free or discounted parking mentoring programs, childcare, etc. **PAY FOR PERFORMANCE PLAN** - A method of compensation where workers are paid based on productivity, as opposed to hours spent on the job or at a set salary. **TWO GENERAL CATEGORIES OF PAY-FOR-PERFORMANCE** **COMPENSATION** **MERIT PAY INCREASES** - are salary boosts awarded to employees for exceptional performance, typically Given annually. **VARIABLE PAY PROGRAMS** - Variable pay programs include various bonuses that can change based on eligibility,pay out periods, and performance metrics. **Discretionary bonuses** - are awarded on an adhoc basis to employees who Demonstrate exceptional performance,often without consideration of pre-defined Goals and objectives. **Some common discretionary bonus types are:** **Spot bonuses** - Reward employees "on the spot" for achievements that deserve special recognition. **Project bonuses** - Reward employees for completion or superior completion of a specific Project **Retention bonuses** - Typically awarded to long-tenured employees, or employees in hot jobs, to decrease their flight risk **NONDISCRETIONARY BONUSES** Incentives are rewards given to employees, teams, or organizations for achieving specific goals. **Some common non-discretionary bonus types include:** **COMPANY-WIDE BONUSES** - reward employees based on how much improvement is made on these goals within a certain period of time. **NONDISCRETIONARY BONUSES** - these focus around specific improvement goals for one team and are rewarded based on performance for that team. **TEAM-INCENTIVE BONUSES** - these focus around specific improvement goals for one team (e.g., marketing or sales) and are rewarded based on performance for that team. **INDIVIDUAL INCENTIVE BONUSES** - these plans are often based on predetermined, measurable business objectives (MBOs) that are evaluated periodically (e.g., each quarter) based on one person's performance. **ADVANTAGES OF PAY FOR PERFORMANCE PLAN** 1\. UNLIMITED COMPENSATION 2\. INCREASED MOTIVATION 3\. FLEXIBILITY 4\. INCREASED PRODUCTIVITY 5\. BETTER RETENTION **PERFORMANCE APPRAISAL** - Performance appraisal is the systematic evaluation of the performance of employees and to understand the abilities of a person **ADVANTAGES OF PERFORMANCE APPRAISAL** 1. **PROMOTION** 2. **COMPENSATION** **3. EMPLOYEES DEVELOPMENT** **4. SELECTION VALIDATION** **5. COMMUNICATION** **6. MOTIVATION** **KEY DIFFERENCESFROMOTHER** **COMPENSATION-RELATED TERMS** **Compensation philosophy:** This represents the \"why\" behind a company\'s compensation approach. It sets guiding principles and long-term goals for how the company will compensate its employees. **Compensation strategy:** This outlines the \"how\" and \"what\" that operationalize the compensation philosophy. It\'s the comprehensive plan and methods used to achieve the Compensation philosophy. **Compensation plan:** This is a detailed \"road-map\" that implements the compensation strategy. It provides specific guidelines and structures for day-to-day compensation decisions. **Compensation package:** This refers to the combination of salary, bonuses, and equity that an employee receives **3TYPES OF LEADING THE MARKET** **COMPENSATION STRATEGY** **LEADING THE MARKET** Market leaders offer compensation packages above the 50th percentile to attract and retain top talent. The most common percentile range within this strategy is between 75-90. ADVANTAGES of leading the market: - Compete in recruiting - Improve retention - Increase morale - Boost productivity DISADVANTAGES of leading the market: - Puts pressure on staff to perform at a high level - Vulnerable to market volatility - Need to closely monitor performance **MEETING THE MARKET** "meeting the market" strategy aligns compensation packages with the 50th percentile of the market. **LAGGING THE MARKET** Offering compensation packages below the 50th percentile of the market. **SALES COMPENSATION STRATEGY** typically includes a mix of base salary and performance-based incentives, such as commissions and bonuses.This strategy is crucial for motivating sales teams to Achieve targets and drive revenue growth. **HOW TO IMPLEMENT AN EFFECTIVE COMPENSATION STRATEGY** **1. Define Objectives** Determine what you want to achieve with your compensation strategy. **2. Conduct Market Research** Benchmark your compensation practices against industry standards to ensure competitiveness. **3. Develop a Compensation** **Philosophy** Establish the guiding principles for your compensation strategy. **4. Design the Compensation** **Structure** Create a detailed compensation plan **5. Communicate The Strategy** ensure transparency and Understanding **6. Regularly Review and Adjust** Continuously monitor the effectiveness of your compensation strategy **Compensation Strategy** **Competitive salaries:** Offering base salaries that are above the industry average to engineers. **Performance bonuses**: Providing significant bonuses tied to project completion and performance metrics. **Equity options**: Granting large stock option packages to engineers as an incentive to join and feel more invested in the company's success. **Comprehensive benefits:** Offering extensive health insurance, retirement plans, and wellness programs. **JOB BASE PAY STRUCTURE** - **JOB ANALYSIS**. It determines what major work connected behaviors and traits, responsibilities, capabilities, experiences and the like are needed to perform a job. **COMPETENCY-BASED JOB ANALYSIS(CBA)** - Focuses on the KSAOs necessary for performing a job successfully. **TASK INVENTORY ANALYSIS** - collects information on tasks, and the frequency and importance of each task for the job. **FUNCTIONALJOB ANALYSIS(FJA)** - In this method, jobs are broken down into areas related to data, people, things, worker instructions, reasoning, maths and language. **CRITICAL INCIDENT TECHNIQUE** -. Focuses on identifying key events (or \"critical incidents\") where effective or ineffective job behavior significantly impacts the job outcome. **JOB DESCRIPTION** - This is a list of the tasks, duties and responsibilities (TDRs) that a job entails. **WRITING A JOB DESCRIPTION** begins from gathering information from sources who can identify the details of performing a task **IMPORTANT ELEMENTS OF THE JOB DESCRIPTION:** - **TITLE OF THE JOB** - **ADMINISTRATIVE INFORMATION ABOUT THE JOB** - **SUMMARY OF THE JOB, FOCUSING ON EACH PURPOSE AND DUTIES** - **ESSENTIAL DUTIES OFTHEJOB** - **ADDITIONAL RESPONSIBILITIES** **JOB SPECIFICATION** Is an essential tool for effective compensation management. By clearly defining the qualifications and requirements for each role, **COMPONENTS KNOWLEDGE** - It refers to factual or procedural information that is essential for successfully completing a task **SKILLS** - It represents an individual\'s level of proficiency in performing a specific task. It reflects their ability to perform well. **ABILITY** - Is the capacity to perform a task,often expressed as the potential to develop a skill. **OTHER CHARACTERISTICS** These traits reflect an individual\'s drive and commitment to achieving goals. **LEGAL REQUIREMENTS** These requirements ensure that individuals meet specifics standards and qualifications. **DECISIONS ABOUT PAY** **JOB BASED** - paid based on responsibilities of a position rather than your personal skills. **JOB STRUCTURE** - the relative pay for different jobs within the organization. **PAY LEVEL** - the organizations pays for a particular job. **PAY STRUCTURE** - the pay policy resulting from job structure and pay level decisions. **LEGAL REQUIREMENTS FOR PAY** 1. **EQUAL EMPLOYMENT OPPORTUNITY** **2. MINIMUM WAGES** RA No. 6727, **3. OVERTIME PAY** **4. CHILD LABOR** RA 9231 Sec 3, Sec 12-A **5. PREVAILING WAGES** **JOB BASE PAY STRUCTURE** **PAY FOR VALUE** In a job based pay structure; you essentially get paid for the value of the work you perform for the company. **FAIRNESS AND EQUALITY** pay theoretically shouldn\'t vary based on personal qualities you present. **CLEAR STEPS TO HIGHER PAY** see significant boost in pay. **PAY COMPARISONS** allows you to more easily compare To offered by other employees. **EXTERNAL COMPETITIVENESS** - Refers to the pay relationship among organizations the organization pay relative to its competitors **WHAT IS PAY LEVEL?** used to denote difference in compensation due to smallest possible change in job specification. **PAY LEVEL TYPES** **CLOSE PAY LEVELS:** When pay level are close, then difference in two job level in terms of job specification becomes very thin. **WIDE PAY LEVEL:** In this pay structure, pay levels are separated by wide difference in job specification. Due to this person tend to be in same level for longer time period. **PAY MIX** the ratio of base salary and target incentives that makes up target total cash compensation --- is a common pain point **LABOR DEMAND** How many people will a specific employer hire? The answer requires an analysis of labor demand. **MARGINAL PRODUCT** The marginal product of labor is the additional output associated with the employment of one additional human resource unit, with other production factors held constant.. **MARGINAL REVENUE** Marginal revenue is the money generated by the sale of the marginal product, the additional output from the employment of one additional person. **LABOR SUPPLY MODEL** This model assumes that many people are seeking jobs, that they possess accurate information about all job opening. **The two key product market factors.** 1. Product demand -- Puts a lid on maximum pay level an employer can set 2. Degree of competition -- in highly competitive markets, employers are less able to raise prices without loss of revenue **ORGANIZATION FACTORS** 1\. Industry and Technology 2\. Employer size 3\. People's Preference 4\. Organization Strategy **COMPETITIVE PAY POLICY ALTERNATIVES** 1. **PAY WITH COMPETITION (MATCH)** - A pay with competition policy involves to ensure that an organizations wage cost is appropriately equal to its labor market competition. 2. **LEAD PAY-LEVEL POLICY**- Maximizes the ability to attract and retain quality employees and minimizes employee satisfaction with pay. 3. **LAG PAY**- level policy is coupled with the promise of higher future returns, this combination may increase employee commitment and foster teamwork, which may increase productivity. **CONSEQUE NCES OF PAY LEVEL AND MIX DECISION S** 1. EFFICIENCY 2. FAIRNESS 3. COMPLIANCE **DESIGNING PAY LEVELS, MIX AND PAY STRUCTURES** The major decisions in setting externally competitive pay and designing the corresponding pay structures are: 1. 2. 5\. Interpret survey results and construct the market line, 6\. Construct a pay policy line that reflects external pay policy, and 7\. Balance competitiveness with internal alignment through the use of ranges, flat, rates, and/or bands. - A pay structure is a system that defines what each individual and each role is paid based on their value to the business an effectiveness on their role. - Also known as salary structures, they set out different levels of pay for jobs, or group of jobs by reference to: **TYPES OF PAY STRUCTURES,** **GRAIDED STRUCTURES** **BROADBAND** - Similar to conventional graded structures, but with far fewer and far wider bands. The maximum of the band can be 100% or more above the minimum. **JOB FAMILY STRUCTURES** - Each job family has a different graded structure. Jobs are allocated to a job family based on activities carried out: skills and competencies Such as Information Technology. **Advantages of Performance Appraisal** - **Promotion**. - **Compensation** - **Compensation packages** - **Employees Developmen**t: - **Selection Validation**: - **Motivation** - **Communication** Following are the tools used by the organizations for Performance Appraisals of their employees. - Ranking - Paired Comparison - Forced Distribution - Confidential Report - Essay Evaluation - Critical Incident - Checklists - Graphic Rating Scale - BARS (Behaviorally anchored rating scale) - Forced Choice Method - MBO (Management by objectives) - Field Review Technique - Performance Test