COMPENSATION MANAGEMENT

WHAT IS COMPENSATION???

A LABORER GETS RS. 200.00 FOR SWEATING FOR 9 HOURS AND THE ENGINEER GETS FEW LAKHS!!!!!!!!!!

WORKER GETS PAID FOR WORKING WHILE THE MANAGER GETS PAID FOR??????

SITTING!!!

CASE STUDY

A friend of ours writes that she is in one of the touring companies of the musical Cats. In the company are two performers called “swings” who sit backstage during each performance. Each swing must learn five different lead roles in the show. During the performance, the swing sits next to a rack with five different costumes and makeup for each of the five roles. Our friend, who has a lead in the show, once hurt her shoulder during a dance number, She signaled to someone offstage, and by the time she finished her number, the swing was dressed, in makeup, and out on stage for the next scene. Our friend is paid $ 2000 per week for playing one of these cats in the show, she is expected to do a certain number of performances and a certain number of rehearsels per week. SHE GETS PAID FOR HER JOB??The swing gets paid $ 2900 per week, whether she performs 20 shows that week or none.

JUST THINK FOR A MINUTE!!!!!!

NOW WHAT IS SHE PAID FOR???

She is paid for knowing the five roles, whether she plays them or not.Think of other professionals you know Electricians, payroll supervisors, etc etc,

COMPENSATION: DEFINITION PLEASE???

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs. INTRINSIC C reflects employees’ psychological mindsets that result from performing their jobs. EXTRINSIC C includes monetary and non- monetary rewards. TYPES OF COMPENSATION

COMPENSATION MANAGEMENT REVEALS ALL THESE SECRETS TO US AND ALSOHOW WE CAN USE IT TO OUR BENEFIT!!!!!

These are a few pay programs and a single employer uses more than one of these.CASH COMPENSATION :

1. BASE WAGE: is the cash compensation that an employer pays for the work performed.

2. It reflects the value of the work or skills and generally ignores differences attributable to individual employees

1. MERIT PAY\COST OF LIVING ADJUSTMENSTS: Periodic adjustments to base wages may be made on the basis of changes in what employers are paying for the same work, changes in the overall cost of living, or changes in experience or skill.

2. majority of Indian firms use merit pay increases, Outstanding performers could get 8 to 10 % increase while COLA gives same % increase to all across the board regardless of the performance

INCENTIVES: tie the pay increases directly to performance, However Incentives differ form merit adjustments.

First incentives o not increase the base wage and so must be re earned each pay period. Incentives try to influence future behavior whereas merit recognizes (rewards) past behavior THE DIFFERENCIATION IS A MATTER OF TIMING.

When Performance declines incentive pay automatically declines, too they are referred to as VARIABLE PAY!!!!

INCOME PROTECTION

WORK LIFE FOCUS

ALLOWANCES

RECOGNITION AND STATUS

EMLOYMENT SECURITY

CHALLENGING WORK

CASH COMPENSATION

BENEFITS

RELATIONAL RETURNS

BASE MERIT\COST OF LIVING

SHORT TERM INCENTIVES

I. 1 LONG TERM INCENTIVES: Usually in the form of ESOP’s (employee stock option plan). These focus on employee efforts on multiyear results.

II. The idea behind stock option is that employee with a financial stake in the Oz will focus on long term financial objective etc. Bristol-Myers, Squibb grant stock to selected Key contributes while Yahoo, PepsiCo, Wal Mart etc offer to all their employees.

1. BENEFITS: INCOME PROTECTION: Benefits, including income protection, work life balance services, and allowances are also part of total compensation. Medical insurance, retirement programs, life insurance, and savings plans are common benefits, They help protect employees from the financial risks inherent in daily life. Healthcare benefits have increasingly become an important form of pay.

2. WORK LIFE FOCUS: are programs that help employees better integrate their work and life, include time away from work ( Vacation) access to services to meet specific needs (drug counseling, financial planning, referrals for child and elder care) and flexible work arrangements. Aim is that the employee is “Fully present” at work and less distracted by conflicts between their work and non work responsibilities.

ALLOWANCES: often grow of whatever is in short supply. In Vietnam and China, India etc, housing and transportation allowances are frequently part of the pay package. Sixty years after the end of World War II some Japanese companies still continue to offer a “Rice allowance” based on the number of family members.

SENIORITY PAY: system reward employees with periodic additions to base pay according to employees length of service in performing their jobs, These pay plans assume that employees become more valuable to companies with time and that valued employees will leave if they do not have a clear idea that their wages will progress over times (Comes from HUMAN CAPITAL THEROY which states that employees knowledge and skills generate productive capital known as human capital and they refine their skills over a period of time.INTRINSIC VS EXTRINSIC

Why does bill gates still show up for work every morning??? Why does Microsof millionaires continue to write codes???

INTRINSIC compensation represents employees’ critical psychological states that result from performing their jobs.

According to JOB CHARACTERSTICS THEORY these critical psychological states, employee

experiences enhanced psychological states when their jobs rate high on five core job dimensions.

i. Skill variety: is the degree to which the job requires the person to peform different tasks and involves different skills, abilities and talents.

ii. TASK IDENTITY: is the degree to which a job enables a person to complete an entire job from start to finish.

iii. TASK SIGNIFICANCE is the degree to which the job has an impact on the lives or work of other people.(Cancer research scientist)

iv. AUTONOMY: is the amount of freedom, independence, and discretion the employee enjoys in determining how to perform the job(Farmers).

v. FEEDBACK: is the degree to which the job or employer provides the employee with clear and direct information about job outcomes and performance.

Recent study by People, a HR consulting firm suggests that enhanced intrinsic compensation may help reduce excessive turnover

HOW ARE THESE CHARACTERSTICS TRANSLATED INTO PRACTICE?????

Problem of turnover if IT employees!!!! Over time, base salaries and bonuses have risen dramatically to promote the recruitment the very best. But turnover has not slowed down!!!

EXAMPLES include new technologies, learning and training opportunities and challenging technical environments.

Extrinsic compensation include both monetary and non monetary rewards, Compensation professionals establish monetary compensation programs to reward employes according to their job performance level or for learning job related knowledge or skills.

What do you mean by Strategic Analysis? Describe the factors that influence company’s compensation practices.

Strategy = plan, policy, approach, line of attackAnalysis = examination, investigation, breakdown.

Compensation strategy deals about what type of pay model the company should follow which should be in alignment with its Ozal strategy.

We will let the market decide what we need to pay people!!!Unfortunately, it can’t be so easy! Companies compete very differently for very similar talent. Lets compare C strategies at Fire pond, Microsoft, and Bristol-Myers Squibb (BMS), Each have different strategy, but it is tailor made for their business.Fire pond is a small start up that offers “Software solutions to traditional firms trying to grow the e sales part of their business. All these companies emphasize employee performance and commitment, but each company does it

very differently.

What is the strategic perspective?

The strategic perspective involves thinking about how pay can assist in achieving

organization success, while not being fixated on pay techniques

5 Dimensions of Strategy

Objectives Internal alignment External alignment/competitiveness Employee contributions Management

A STRATEGIC PERSPECTIVE FOCUSES ON THOSE COMPENSATION CHOICES THA HELP THE OZ GAIN AND SUSTAIN COMPETITIVE ADVNATAGE

Letz learn form the leader!!!!STARBUCKS

The competitive advantage of Starbacks is apparent with the first sip of its specialty drink, mocha Valencia. What started out as a Seattle seller of coffee beans has, through strategic decisions, grown to a familiar chain of coffeehouses stretching around the globe?

OBJECTIVE: How should compensation support the business strategy and be adaptive to the cultural and regulatory pressures in a global environment? STARBACKS: Grow by making employees feel valued. Recognize that every dollar earned passes through employees hands. Use pay, benefits, and

opportunities for personal development to help gain employee loyalty and become difficult to imitate.

ALIGNMENT: How differently should the different types and levels of skills and work be paid within the Oz? STARBACKS: De emphasizes differences, use egalitarian structures, cross train employees to handle many jobs, and call employees “Partners”.

COMPETITIVENESS: How should total compensation be positioned against competitors? STARBACKS: Pay just slightly above other fast food businesses; give benefits, and stock options called bean stocks.

CONTRIBUTORS: How should the pay increase be based on??? On individual performance or team performance or experience and or continuous learning, or improved skills or changes in cost of living or personal needs or whatSTARBACKS: emphasized on team performance and shareholder returns.

MANAGEMENT: How open and transparent should the pay decisions be to all employees? Who should be involved in designing and managing the system? STARBACKS: As members of the Starbucks “Family” our employees realize what is best for them. Partners can and do get involved.

Strategic Perspectives Toward Total Compensation

• Support the business objectives

• Support recruiting, motivation, and retention of MS-caliber talent

• Preserve MS core values

• Support business mission and goals

• Develop global leaders at every level

• Reinforce team-based culture

• Reduce costs, increase productivity

• Demonstrate respect for individual talent and the limitless potential of a highly motivated team

• Encourage high standards, original thinking, passion for discovery and willingness to take risks

• Reward fresh ideas, hard work and commitment to excellence

• Value diverse perspectives as a key to discovery

MicrosoftMicrosoft Bristol Bristol -- Myers Myers SquibbSquibb

FirepondFirepond

• Integral part of MS culture• Support MS performance driven culture• Business/technology-based organization design structure

• Flexibility for development and growth• Reflect responsibilities, required competencies, and business impact

• Pay differences that foster a collegial atmosphere• Reinforce high expectations

Exhibit 2.1

WHEN ALL DOES A BUSINESS MAKE STRATEGIC CHOICES?????

Exhibit 2.2: Strategic Choices

DEVELOPING A TOTAL COMPENSATION STRATEGY:

THE SIMPLE FOUR STEPS!!!!

1. Assess Total Compensation Implications• Competitive Dynamics• Core Culture / Values• Social and Political Context• Employee / Union Needs• Other HR Systems

1. Assess Total Compensation Implications• Competitive Dynamics• Core Culture / Values• Social and Political Context• Employee / Union Needs• Other HR Systems

2. Fit Policy Decisions to Strategy• Objectives • Contributions• Alignment • Administration• Competitiveness

2. Fit Policy Decisions to Strategy• Objectives • Contributions• Alignment • Administration• Competitiveness

3. Implement Strategy• Design System to Translate Strategy

into Action• Choose Techniques to Fit Strategy

3. Implement Strategy• Design System to Translate Strategy

into Action• Choose Techniques to Fit Strategy

4. Reassess the Fit• Realign as Conditions Change• Realign as Strategy Changes

4. Reassess the Fit• Realign as Conditions Change• Realign as Strategy Changes

Key Steps to Formulating Compensation StrategyKey Steps to Formulating Compensation StrategyExhibit 2.5Exhibit 2.5

The first step includes an understanding of the industry in which the Oz operates and how it plans to compete. Know what factors are important today (Changing customers needs, labor market etc. What will be important in future? What is your business strategy? How do you compete to win?

A pay system reflects the values that guide an employer’s behaviors and underline its treatment of its employees. The pay system mirrors the company’s image and reputation. Microsoft gives it mission and values

statement as “To enable people and businesses throughout the world to realize their full potential”

The simple fact that employees differ is too easily overlooked in formulating a compensation strategy. Ex Older, highly paid workers may wish to defer taxes by putting their pay into retirement t funds, while younger employees may have high cash needs to buy house, support a family, or finance an education.

Step 3 is to implement the strategy through the design and execution of the compensation system. How the compensation system translates strategy into practice and into people’s bank accounts.

The last step is to reassess and realign, closes the loop.

EXCELLENT TEST OF COMPETITIVE ADVANTAGE:

3 Tests for Strategic Advantage

Is it aligned?

Does it differentiate?

Does it add value?

Whichhat is unique?

ALIGN IN 3 TYPES:ALIGN WITH BUSINESS STRATEGYALIGN EXTERNALLY WITH ECONOMIESALIGN INTERNALLY WITH HR SYUSTEMS.

HOW IS OUR STRATEGY DIFFERENT FROM OTHERS!!! MICROSOFT USES STOCK AWARDS MORE THAN BASIC PAY, DIFFICULT TO COPY!!!

ADD VALUE: ITS EASIRE TO COUNT BOTTLES THAN TO DESCRIBE THE WINE, HERE THE CO TRIES TO MEASURE THE ROI ON WHATS BEING PAID.

2 Approaches Contrasted

Best fit– Do what works in a specific situation

Best practice– Do what works best in other places

So What Matters More -Best Practices or Best Fit?

Some research supports the “best practices” approach

Some research supports the “best fit”approach

ACCORDING to examination of eight years of data from 180 U.S. companies, “ITS NOT HOW MUCH YOU PAY, BUT HOW YOU PAY THAT MATTERS THE MOST”