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Chapter
Compensation and Benefits
1–2 What Is Compensation?
Compensation refers to the monetary and
nonmonetary rewards—often referred to as “total
rewards”—that employees receive from their
employer in exchange for the work they perform.
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Compensation is a form of motivation.
Compensation motivates employees to create value for the organization by
following the organization’s vision, strategy, processes, or priorities to
produce sought-after outcomes.
The forms of compensation described till now-salary, benefits, perquisites
(“perks”), etc.—are known as extrinsic rewards.
Intrinsic rewards are harder to quantify, but are no less important (perhaps
more important) forms of motivation.
Intrinsic rewards include self-esteem, meaning, freedom, and status, and can
be powerful motivators. However, they are not the focus of this chapter.
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Employee compensation refers to all forms of pay
or rewards going to employees, which include
direct financial payments and indirect payments,
arising from their employment.
Direct financial payments include wages,
salaries, incentives, commissions, and bonuses.
Indirect payments include financial benefits like
employer-paid insurance and vacations
Components of the Compensation System
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Components of Remuneration
Wages and Salary- Employees get an annual increment on wages
and salaries, based on nature of the job, type of industry, employees’
seniority, and merit.
Incentives- Financial rewards for exceeding set standards of
performance. In addition to wages and salaries employees get
incentives, which are also known as payment by results. Incentives
are of two types: individual incentives and group incentives.
Fringe Benefits- Indirect financial or non-financial payment
employee receives for continuing their employment with the
company. Provident fund, gratuity, accidental benefit, health and
group insurance, uniform, canteen, discounts on purchase of
company’s products etc.
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Components of Remuneration
Perquisites- Whereas a fringe benefit is well defined and would
include all employees within the organization, perquisites (or perk)
are less well defined and sometimes given to employees as a special
privilege.
Non-monetary benefits- Job sharing, flextime, recognition (e.g.
employee of the month), challenging job assignments are example
of non-monetary benefits.
What determines package offered
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by an organization?
1–9 Factors Determining Pay Rates
Alignment with strategy
Pay Policies
Equity
Union influences on compensation decisions
Geography
Legal considerations
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Aligning Total Rewards with Strategy
Total Rewards: traditional pay, incentives, benefits + challenging jobs+
career development + recognition programs
The basic thrust in pay plans today is to produce an aligned reward
strategy to create compensation plans that guide employee behaviors
in the desired, strategic direction.
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Pay Policies
Employers compensation strategy will manifest itself in pay policies.
e.g. paying 20% above the prevailing market wage
Sharing business gains with employees in the form of bonus of
incentive payments.
Pay policies can influence the employers performance & profitability.
Major issue in pay policy – Seniority or performance?
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Equity & its Impact on Pay Rates
Equity Theory of Motivation:
Internal External
Equity Equity
1–13 Developing a Compensation Strategy
(Contd.)
Legal considerations in India
Payment of Wages Act (1936)
Minimum Wages Act (1948)
Equal Remuneration Act (1976)
Payment of Gratuity Act (1972)
The Payment of Bonus Act (1965)
Workers who are not covered by the definition of employee are not eligible
for benefits provided by certain legislations (industrial Disputes Act or
Shops & Commercial Establishment Act(s) of diff states)
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Union Influences on Compensation Decisions
In India, Trade Unions Act (1926) granted employees the right to unionise & to bargain collectively
Historically compensation is the central issue in collective bargaining
Formal collective bargaining agreements between trade unions & employers form the foundation of pay plans. –
mostly restricted to public sectors & formal pvt sector organizations with trade union presence.
Pay agreements with union involvement happens:
Industry level: e.g. nationalized banks, public sector insurance companies. Employees across organizations demand a
common pay agreement
Multi-unit company level: one agreement for different units of the same company
Unit/plant Specific agreements: localized agreement with local unions. Such agreements obtain legal sanctity only when
registered under the Industrial Disputed Act
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Geography
City compensatory allowance to account for geographical differences in cost of living
Compensating Expatriate Employees
• Home-based plan
o Transferee’s base salary tied to home country’s salary structure
• Host-based plan
o Transferee’s base salary tied to the host country’s salary structure
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Other things that determine pay rates is
Organizations ability to pay
Organizations ability to attract talent
1–17 Determining What to Pay
Once a compensation strategy is fixed its imp to decide on a given
job what should be paid
Two approaches to set pay rates:
1. Market Based Approach – Conducting formal or informal surveys to
determine what others in the relevant job market are paying for
particular job. Use these figs to price their own jobs.
Takes care of external equity
2. Job evaluation methods
Takes care of internal equity
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Thank you.
