103209 - HUMAN RESOURCE MANAGEMENT
Compensation Methods & Planning
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Dr. Karthik Mohandoss
CHAPTER – IV
LEARNING OUTCOMES
At the end of this chapter you will be able to understand and

The definition of compensation

Components of compensation

Factors influencing compensation

Designing a compensation system

Determining individual pay

Types of payment system

Solution to problems in compensation
Dr. Karthik Mohandoss
have knowledge about
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COMPENSATION
Dr. Karthik Mohandoss
Cash, Bonuses, Insurance,
Vacation, Holidays
Perks, Recognition
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What does compensation mean to you?
Dr. Karthik Mohandoss
All forms of
Financial return,
Tangible services &
Benefits
that employees receive as part of their employment
relationship
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COMPONENTS OF A TOTAL COMPENSATION PROGRAM
Financial
Direct
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
wages, salaries, commissions, bonuses
Indirect

Insurance plans


Social assistance benefits


life, health, dental, disability
retirement plans, social security, workers’ comp
Paid absences

vacations, holidays, sick leave
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Non-Financial
The Job
Interesting, Challenging, Responsible

Opportunity for recognition, Advancement

Feeling of achievement
Dr. Karthik Mohandoss

Job Environment

policies, supervision, co-workers, status symbols, working conditions,
flextime, compressed work week, job sharing, telecommuting, flexible
benefits programs
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FACTORS THAT INFLUENCE WAGE LEVELS
Conditions of
Labor Market
Compensation
Policy of
Organization
Cost of
Living
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Area Wage
Rates
Worth of
Job
WAGE
MIX
Employee’s
Relative Worth
Collective
Bargaining
Legal
Requirements
Employer’s
Ability to Pay
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Dr. Karthik Mohandoss
DESIGNING A COMPENSATION SYSTEM
Steps in the Decision Process
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STEP-1
ESTABLISH GENERAL WAGE LEVEL FOR ORGANIZATION
Factors to consider:
Other firm’s rates

Union demands

Cost-of-living changes

Firm’s ability to pay
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
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STEP-2
ESTABLISH WAGE STRUCTURE (THE PAY FOR EACH JOB)
Employ a job evaluation system
Ranking

Job Classification

Point System

Factor Comparison
Dr. Karthik Mohandoss
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Results:

Pay grades

Rate ranges
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STEP-3
ESTABLISH PAY FOR EACH INDIVIDUAL ON EACH JOB

Performance appraisal information

Seniority system
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Inputs:
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MARKET WAGE AND SALARY SURVEYS
Select key jobs.
o
Determine relevant labor market.
o
Select organizations.
o
Decide on information to collect:wages/benefits/pay policies.
o
Compile data received.
o
Determine wages and benefits to pay.
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o
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MARKET WAGE LEVELS
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•Which company is leading the market?
•Which company is lagging the market?
• What would the wage level line look like for a company that was
meeting/matching the market?
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DETERMINATION OF INDIVIDUAL PAY
Three questions need to be addressed
How should one employee be paid relative to another
when they both hold the same job in the organization?
2.
Should we pay all employees doing the same work at the
same level the same?
3.
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1.
If not, on what basis should we make the distinction?
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PAY DIFFERENTIALS ARE BASED ON:
1.
Individual
differences
in
experience,
skills,
and
2.
Expectations that seniority, higher performance (or both)
deserve higher pay
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performance
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TO PAY EMPLOYEES AT
DIFFERENT RATES FOR THE SAME JOB
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REASONS FOR CHOOSING
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
Pay differentials allow firms to recognize that different employees
performing the same job make substantially different contributions
to meeting organizational goals
Differentials allow employers to communicate a changed emphasis
on important job roles, skills, knowledge, etc.

Differentials provide organizations with an important tool for
emphasizing norms of enterprise without having employees change
Dr. Karthik Mohandoss

jobs (i.e., promotion)

Pay differentials allow firms to recognize market changes between
jobs in the same grade without requiring a major overhaul of the
whole compensation system
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Without differentials

The pay system violates the internal equity norms of most

Reducing satisfaction with pay, and

Making attraction and retention of employees more difficult
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employees,
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METHODS OF PAYMENT
Flat Rates
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Payment for Time
Worked
Variable Pay:
Incentive
Compensation
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SOLUTIONS TO THE PROBLEM OF COMPENSATION
Re-examining how many entry-level people are needed
2.
Reassessing recruitment itself
3.
Focusing on the job evaluation process, emphasizing
performance instead of salary-grade assignment
4.
Basing all salaries on longevity
5.
Giving first-line supervisors and other managers the authority
to recommend equity adjustments for incumbents who have
been unfairly victimized by pay compression
Limiting the hiring of new employees seeking excessive
salaries
6.
Dr. Karthik Mohandoss
1.
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SUMMARY

There is a growing realization that traditional pay systems do not

The trend is toward a total compensation approach made up of
base pay, variable pay, and benefits

Flexibility is an essential ingredient in any compensation plan and
Dr. Karthik Mohandoss
effectively link pay to performance
can be built using a variable pay approach
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Dr. Karthik Mohandoss
Thank you
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