compensation management part 1

Role of Compensation in OrganisationsUNIT 1

Objective

REWARD FOR PAST SERVICE TO STIMULATE EVEN BETTER

PERFORMANCE IN FUTURE

An Effective tool to develop, build and maintain “human capital” for competitive advantage

Economic & Behavioral Theories

REWARDS INFLUENCE BEHAVIOR REINFORCEMENT THEORY REWARDS TO BE EQUITABLE REWARDS SHOULD BE OF VALUE TO

EMPLOYEE DUAL FACTOR THEORY OF JOB

SATISFACTION / MOTIVATION –COMBINATION OF EXTRINSIC & INTRINSIC REWARDS

REWARDS INFLUENCE BEHAVIOR NOT TO FORGET THAT PAY IS IMPORTANT

TO INDIVIDUALS & HAS THE POWER TO INFLUENCE MEMBERSHIP BEHAVIOR

EXPECTANCY THEORY MISCONCEPTION THAT REWARDS OF

OTHERS A SOURCE OF DISSATISFACTION OVERALL SATISFACTION IS A RESULT OF A

MIX OF REWARDS

TOP FIVE WORK VALUESRANRANKK

MANAGERSMANAGERS PROFESSIONAPROFESSIONALL

CLERICALCLERICAL HOURLYHOURLY

1 Pay Benefits

Advancement Pay Benefits

Pay Benefits

2 Advancement

Pay Benefits Advancement

Security

3 Authority Challenge Supervision

Respect

4 Accomplishment

New Skills Respect Supervision

5 Challenge Supervision Security Advancement

Economic Theories

1.Subsistencetheory

Compensation

2. Wage FundTheory

3.Residual Claimant Theory

“Social wage “Theories-Classical

Ricardo Adam Smith Walker

4. Marxian Theory Macro Theories

Micro Theories

Micro & Macro Theories

Justification theories

Behavioraltheories

5.Marginal ProductivityTheories

6.BargainingTheory

7.Supply & DemandTheory

8. CompetitiveTheory

9.Employee’sAcceptancelevel

10.Internal Wage Theory

Wage &Motivators

WAGE THEORIESWAGE THEORIES

3.Behavioral 3.Behavioral TheoriesTheories

COMPENSATIONCOMPENSATION

Subsistence theory

Bargaining Theory

Marginal Productivity

Theory

Marxian Theory

Residual Claimant Theory

Wage fund Theory

Employee’s Acceptance

Level

Competitive Theory

Supply and Demand

Theory

Wage and Motivators

InternalWage

Structure

1.’’Social 1.’’Social Wage Theories Wage Theories (classical)(classical)

2.’’Justification’’ 2.’’Justification’’ Theories Theories

Macro Macro TheoriesTheories

Micro Micro TheoriesTheories

Micro-Micro-Macro Macro TheoriesTheories

Motivation Theories

Alderfer’s 3 level(ERG)

McClelland’s 3 modes of success

Herzberg’s 2 factor

Maslow’s hierarchyPhysiological

Safety & security

Belongingness

Esteem

Self Actualisation

Hygiene factors Motivators

n Achievement n Power n Affiliation

Existence Relatedness Growth

CONTENT Theories

Process Theories

Vroom’s Expectancy theory

Equity Theory Locke ‘s Goal setting

M= ExUxI

Effort Valence Outcome

Comparisons in work situation

Strategic perspectives

In this session….

We’ll examine the relationship between organizational strategy and compensation strategy

We’ll begin to think about different factors that might influence compensation strategy

Organizational Strategy There are several approaches

organizations take when developing overall strategy, e.g., High cost, low volume Low cost, high volume

Choice of strategy depends on industry, geographic location, organizational size, nature of competition, etc.

HR Strategic Alignment

COMPETITIVE ADVANTAGE THROUGH PEOPLE -HOW?????

Human resource add value to bottom-line Hiring Skills, knowledge, abilities –

competitive advantage Competencies difficult to imitate Collective Collative team synergy-

organised effort

COMPETITIVE CHALLENGES & HRM

Going global-diff geographies, cultures, laws & business practices, identifying expatriate managers,HCN,PCN,TCN

Embracing New Technology-virtual organisations, from touch labor to knowledge workers,HRIS

Managing change-HR issues ( lack of sense of urgency,cohesive coalition,leadership, communication, human mindset resistance, not anchoring to corporate culture)

COMPETITIVE CHALLENGES & HRM

Developing Human Capital-(differentiate bet HR & HC)

Responding to the market-TQM, Outsourcing & Employee Leasing, Productivity Enhancements

SOCIAL ISSUES IN HRM

Demographic changes-Diversity, age distribution, gender distribution,rising levels of education,cultural changes (employee rights, concern for privacy,changing attitudes, work life balance

THE HUMAN RESOURCES APPROACH TO MANAGEMENT

EMPLOYEE MOTIVATION APPLIED ABILITY

QUALITY, QUANTITY OF WORK

ORGANISATIONAL PRODUCTIVITY & PROFITSEMPLOYEE

REWARDS & RECOGNITION

HUMAN RESOURCE AREAS

Outputs

•Quality work life

•Productivity

•Readiness for change

SELECTION &STAFFING

PERSONNEL RESEARCH & INFORMATION SYSTEMS

HUMAN RESOURCES PLANNING

ORGANISATION DESIGN

ORGANISATION DEVELOPMENT

TRAINING & DEVELOMENT

EMPLOYEE RELATIONS-LABOUR-UNION

EMPLOYEE ASSISTAMCE

COMPENSATION BENEFITS

REWARD STRATEGIES

REWARD PRINCIPLES

STRATEGY DRIVEN PERFORMANCE BASED VALUE BASED BUSINESS & MARKET DRIVEN FLEXIBLE RECOGNITION FAIR OPEN FACILITATING CROSS-BUSINESS MOBILITY,

REALISING ECONOMIES OF SCALE& SHARING BEST PRACTICES

REWARD STRATEGY

REWARD STRATEGY – COMMON SET OF OBJECTIVES & SUCCESS CRITERIA

INCLUDES COMPENSATION, PERQUISITES , INCENTIVES…

OBJECTIVES OF COMPENSATION

ATTRACTING TALENT RETAIN CURRENT TALENT MOTIVATION FOR BETTER PERFORMANCE REWARD DESIRED BEHAVIOR ENSURE EQUITY-INTERNAL & EXTERNAL CONTROL COSTS COMPLY WITH LEGAL REGULATIONS FACILITATE EASY UNDERSTANDING BY ALL EASY ADMINISTRATION

Compensation Strategy Likewise, compensation strategy should mirror

and align with the organization’s strategy Questions to ask regarding alignment:

Who are my competitors? How is my business similar to or different from other

companies? What are the core competencies that give our business

a competitive advantage? How does location impact our ability to attract and retain

talent? What should our competitive position be regarding pay?

Compensation Strategy Decisions Top management usually decides the organization’s

compensation strategy: “Lead” strategies tend to attract more workers, but

don’t necessarily lead to less turnover or less unionization or higher productivity

“Lag” strategies are often chosen to keep labor costs low and profits high, but often result in attracting lower-quality workers who’ll leave for $.05/hr increase

“Target” strategies (pay at market rate) are usually the most effective at attracting and retaining employees

Compensation Strategy Decisions The compensation strategy chosen can be used

overall in the organization or with different core functions independently; for example, An organization decides that it is not attracting or

is losing highly skilled computer analysts The quality of life on a university campus is seen

as a major attraction for employees A new organization in a small town decides to

compete with a similar, more well-established unionized organization 10 miles away in a large city

Strategy Mapping—Desired

ObjectivesAttract & Retain TalentEquitable Treatment

AlignmentCareer GrowthFlexible Design

Competitive PositionMatch CompetitorsEmphasize Life Balance

PerformanceIndividual PerformanceShared Success

ExecutionMaximize ChoicesOpen Communication

1 2 3 4 5

Least Important

Most Important

Strategy Mapping--Current

ObjectivesAttract & Retain TalentEquitable Treatment

AlignmentCareer GrowthFlexible Design

Competitive PositionMatch CompetitorsEmphasize Life Balance

PerformanceIndividual PerformanceShared Success

ExecutionMaximize ChoicesOpen Communication

1 2 3 4 5

Least Important

Most Important

Strategy Mapping Comparison

ObjectivesAttract & Retain TalentEquitable Treatment

AlignmentCareer GrowthFlexible Design

Competitive PositionMatch CompetitorsEmphasize Life Balance

PerformanceIndividual PerformanceShared Success

ExecutionMaximize ChoicesOpen Communication

1 2 3 4 5

Current ----- Desired

Aligning Organizational and Compensation Strategies

What pay strategy might they currently have? Desire to have?

If you were a consultant for this organization, what would you suggest regarding pay strategy? Why?

Strategic Reward Systems : Design and Strategic Choice Issues

Basic goals of a compensation system Attract employees Retain employees Motivate employees Compliance with pay laws Administrative simplicity Cost effectiveness

Strategic Reward Systems : Design and Strategic Choice Issues

Critical Thinking Questions

1. Which goals would be most critical for a technology company

2. Which goals would be most critical for a non-profit company?

Strategic Reward Systems : Design and Strategic Choice Issues

Design Issues Job-based vs. Individual-based pay design Fixed vs. Variable pay Internal vs. External pay equity emphasis Performance vs. Membership as basis for

rewards

Strategic Reward Systems : Design and Strategic Choice Issues

Design Issues Egalitarian vs. Elitist allocation of perks &

rewards Market position of base salaries:

Meet the marketLead the marketLag the market

Monetary vs. non-monetary reward emphasis

Strategic Reward Systems Design and Strategic Choice Issues

Administration Framework Open Pay vs. Pay Secrecy Centralized vs. Decentralized pay

administration

Strategic Reward Systems : Design and Strategic Choice Issues

Critical Thinking Questions:

1. Why do most private firms choose to have a pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system where employee participation is a strong element of corporate culture?

2. Should a manager receive higher pay than the subordinates that she/he supervises?

Strategic Reward Systems II: Design and Strategic Choice Issues

Critical Thinking Questions:

3. What are the strategic advantages of paying below the market for pay? Can a firm sustain this pay choice?

4. Why would a firm decide to pay above the market? Is this choice open to all firms in an industry or sector?

REWARD STRATEGY

REWARD STRATEGY – COMMON SET OF OBJECTIVES & SUCCESS CRITERIA

INCLUDES COMPENSATION, PERQUISITES , INCENTIVES…

Compensation as Motivation

Money and Motivation

Incentives motivate workers See “systematic soldiering” without them Taylor standardized a fair day’s work Which led to the scientific management

movement Which in turn led to modern day HR

practices

MOTIVATION THEORIESCONTENT THEORIES Scientific Management-wages & incentives Human Relations Economic security, working conditions Maslow’s Hierarchy Herzberg-motivators & Hygiene factors Alderfer-ERG Needs McClelland’s –need for achievement, power and affiliation

PROCESS THEORIES Lewin & Tolman- Expectancy concerns Vroom Valence/expectancy Porter & Lawler Performance Satisfaction Lawler E-P-O expectations Locke’s goal achievement theory

CONTEMPORARY THEORIES Festinger & Homans Cognitive dissonance /exchange Heider, De Charmes and Bern Cognitive evaluation & self perception Adams - equity Kelly & Rotter Attribution/ Locus of control

Compensation policy

OBJECTIVES OF COMPENSATION policy

ATTRACTING TALENT RETAIN CURRENT TALENT MOTIVATION FOR BETTER PERFORMANCE REWARD DESIRED BEHAVIOR ENSURE EQUITY-INTERNAL & EXTERNAL CONTROL COSTS COMPLY WITH LEGAL REGULATIONS FACILITATE EASY UNDERSTANDING BY ALL EASY ADMINISTRATION

Objectives of Compensation

EffectiveCompensation

LegalLegalcompliancecompliance

AdministrativeAdministrativeefficiencyefficiency

ControlControlcostscosts

RetainRetainemployeesemployees

AcquireAcquirepersonnelpersonnel

EnsureEnsureequityequity

RewardRewardbehaviourbehaviour

Remuneration Choices

Low Base Salaries

Internal Equity

Individual Performance

Standard, Fixed Package

Lag the Market

No Incentives

Job

Performance

Hierarchical

High Base Salaries

External Equity

Group Performance

Flexible Package

Lead the Market

Many Incentives

Skills

Tenure

High Participation

Remuneration Strategy/Philosophy

Remuneration is consistent with strategic business objectives

Strategic questions: How can remuneration policies and practices achieve these objectives

If seeking the ‘best’ people, then it is incongruent to pay below-market rates

If seeking customer service, then the pay must promote superior customer service behaviour

If seeking team based work, then pay must promote team performance

DIMENSIONS OF COMPENSATION

SALARY BONUS-Performance & Profit sharing LONG TERM INCENTIVES PERKS NON COMPENSATION REWARDS

NON COMPENSATION

SYSTEM

i) Enhance Dignity & satisfaction from work performed

v) Allocate sufficient resources to perform work assignments

vi) Grant Sufficient Control over the Job to meet Personal demands

vii) Offer Supportive Leadership & Management

iv) Promote Constructive Social Relationships with co workers

ii) Enhance Physiological health, intellectual growth & emotional maturity

iii) Promote Constructive Social Relationships with co workers

INTRINSIC REWARDS

MoreInteresting

work

Participation in

Decision making

Opportunityfor personal

growth

Greater JobFreedom

& direction

Diversity of

Activities

MoreResponsibility

WHY EXECUTIVE/MANAGERIAL COMPENSATION IS DIFFERENT

Factors & variables are numerous in management jobs & simple comparisons and ratings may not be possible.

Executives are not organized as unionized staff. Secrecy-differing pay based on competence,

experience, loyalty Not based on individual performance but on unit’s Subject to statutory ceilings ????

FACTORS INFLUENCING MANAGERIAL COMPENSATION

Organization's capacity to pay Prevailing pay & benefits in industry/location Competition in industry & availability of special

competent personnel Flexibility Performance/Productivity/Responsibilities of individuals Organization's Philosophy (to be a leader or pay

prevailing rates) Qualification & Relevant experience Stability of employment & advancement opportunities.

MANAGERIAL TRENDS

1980’S EROSION OF EARNINGS AT SENIOR & MIDDLE LEVELS

1988 RESTRICTION ON DIRECTOR’S SALARY RAISED TO Rs 15,000 P.M. UNDER SEC 269 OF COMPANIES ACT, 1956

1993-REVISED TO 50,000 P.M.+ PERKS EQUAL TO ANNUAL SALARY OR Rs 4.5 LAKH WHICHEVER IS LESS

MANAGERIAL TRENDS

UPTO 1990 MANAGERIAL SALARIES STABLE , LOW & PREDICTABLE

TURNING POINT POST NEP-AGE OF MEGA-BUCK MANAGERS IN 1990’S