NewBase 19 April 2024 Energy News issue - 1717 by Khaled Al Awadi.pdf
Overview of Compensation Management
1. PERFORMANCE AND COMPENSATION MANAGEMENT
(HRM 751)
OVERVIEW:
COMPENSATION MANAGEMENT
SITI ZAIHASRINA BINTI HASSAN
(2012208912)
Prepared for:
Assoc. Prof. Dr Roshidi Hassan
2. Outline
•
Introduction of compensation management
–
–
–
–
–
–
–
•
Compensation system
–
–
–
•
History
Definition
Perspectives
Purpose / objectives
How is compensation used?
Relationship of compensation with performance, motivation, engagement and turnover
Strategic function of compensation
Definition
Relational return
Total compensation
Compensation model
–
–
–
Policies
Technique
Objectives
6. Cont…..
• The concept of workers' compensation had its
origins in Germany, Great Britain and the
United States between the late 1800's and
early 1900's.
• Workers’ compensation became common in
the US in the 1930’s and 1940’s and it
continues until today.
(Lectlaw. 2013)
7. Islamic perspective of Compensation &
Benefits
And for all there are degrees (of reward and punishment)
for what they have done, and (it is) so that He may fully
compensate them for their deeds, and they will not be
wronged
(Surat Al-Ahqaf:19)
Pay the worker for his work before his sweat dries
(HR Ibnu Majah: 2443)
Gave direction to educate the people by mentioning and
promising the reward (Al-Thawab) and punishment (AlIqab)
(Shafeeq, 2013) (Mohd, 2011)
8. DEFINITION OF COMPENSATION
Compensation refers to all forms of financial returns and tangible
services and benefits employees receive as part of an employment
relationship
(Milkovich, Newman & Gerhart, 2011)
The term compensation means any form of payment made to an
individual for services rendered as an employee for an employer;
services performed as an employee representative; and any
separation or subsistence allowance paid under any benefit
(Cornell University Law School Report, 2011)
Compensation referred to as tangible return, include cash
compensation and benefits
(Aguinis, 2009)
9. Compensation of employees measures the total income both
wages and salaries and
supplements to wages and salaries earned by employees in return
for contributing in production.
(Steven. 2012)
Employee compensation is comprised of annual salary
plus, as appropriate, variable compensation awarded at
the end of the year
(Steve. 2011)
All remuneration which is payable to an employee for
work done in respect of his contract of service
(Maimunah. 2011)
Compensation is about what employees receive in
exchange for their contribution to the organization in
terms of tangible and intangible return
10. Traditional VS Contemporary
Compensation Management
- Salary was determined on the basis of the job work and the
years of experience the employee is holding
- Human work for money, there was no space for other
psychological and social needs of workers
- Designed aligned to the business goals and strategies
- Employees are expected to work and take their own
decisions (eg: cafeteria plan)
- Organization offer monetary and non-monetary
benefits to attract and retain the best talents in the
competitive environment.
(Naukri, 2007)
11. SOCIETY
MANAGERS
- Pay as a measure of justice
- Return in an exchange between
employer and themselves
- Job losses (or gains) attributed to
differences in compensation
- Reward for a job well done
- Belief that pay increases lead to price
increases
PERSPECTIVE OF
COMPENSATION
EMPLOYEES
- A major expense
STOCKHOLDERS
- Used to influence employee behaviors
and to improve the organization's
performance
- Using stock to pay employees creates a
sense of ownership
(Milkovich, Newman, Gerhart. 2011)
13. PURPOSE OF COMPENSATION
•
•
•
•
•
EMPLOYER
Attracting candidates
Motivating employee for high performance
Retain talent
Consistency in compensation
•
•
•
•
EMPLOYEE
Work life balance
Recognition
Planning for better quality of life
(Nazri, 2012)
14. PURPOSE OF COMPENSATION
• Retain current employees:
When compensation are not competitive, resulting in
high turnover.
• Reward desire behavior:
Effective compensation plans rewards
performance, loyalty, experience, responsibility and
other behaviors.
• Control cost:
Rational compensation helps an organization obtain
and retain workers at a reasonable cost.
• Facilitate understanding:
Easily understood by human resource
specialist, operating manager and employees. (William, 2013)
15. Compensation Objectives: IBM
Pay for Performance: Pay our best
performers like the best in the
marketplace.
Differentiate Strongly: Give larger
increases/bonuses to those who are most
deserving.
Pay Competitively: Attract, retain and
motivate, as well as enable competitive prices
for IBM services and solutions
IBM’s compensation programs are kept as simple and flexible as possible
in order to keep the control at the first line manager level.
15
(IBM Corporate report,, 2013)
16. Compensation objectives: Medtronic
• Support company mission and increased
complexity
• Minimize increase in fixed cost
• Attract and engage top talent
• Emphasize personal and team performance
• Ensure fair treatment
(Milkovich, Newman & Gerhart, 2011)
17. Benefits Offered
Health Insurance
Life Insurance
Retirement Plans
Paid Holidays
Pre-Tax deductions for Employee benefit
contributions
Long Term Disability Insurance
Paid Vacation
Educational Assistance/Tuition Reimbursement
Sick Leave
Employee Assistance Program (EAP)
Fitness Center or Gym subsidy
Long Term Care Insurance
Flextime
Casual Dress (every day, not just Fridays)
Retiree Health Insurance (post age 65)
Telecommuting
Child Care Assistance (on or off site)
Subsidized employee meals
Free Coffee/Soda
Pet Insurance
Offered by Employers with
250 or more Employees
Rank
97.7%
95.4%
94.4%
94.1%
86.5%
1
2
3
4
5
84.1%
83.7%
75.1%
73.8%
73.1%
36.7%
32.8%
32.5%
32.2%
25.6%
18.9%
7.4%
Not on list
Not on list
Not on list
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Source: Employer Benefits Study, David P. Lind and Associates (2005)
18. HOW IS COMPENSATION USED?
•
•
•
•
Recruit and retain qualified employees
Increase or maintain morale and satisfaction
Reward or encourage peak performance
Achieve internal and encourage company
loyalty
• Modify (through negotiation) practices of
unions
20. RELATIONSHIP OF COMPENSATION WITH >
ENGAGEMENT
• Engagement: employee engagement is typically described as a high level
of employee involvement, commitment to the organization and job
satisfaction (Scot, 2010)
• Respondents: United States, Canada, Western Europe, United
Kingdom, Eastern Europe, Asia-Pacific and the Middle East and other
country.
• 42% respondents indicated that their organization’s total rewards
strategies had a positive effect on employee engagement
• Organizations that encourage managers to engage employees by making it
a performance criteria and rewarding engagement through incentive
programs indicate that their organizations more effectively foster
employee engagement and motivation then those organizations that do
not
21. RELATIONSHIP OF COMPENSATION WITH>
MOTIVATION
•
Motivation is the activation of goal-oriented behavior whether motivation is intrinsic or
extrinsic. Intrinsic motivation is something that comes from the person(challenging
work) and extrinsic motivation is motivation caused by external factors (pay, bonus).
(Khan and Mufti, 2012)
•
Relationship between
(Ghanzafar, 2011)
•
Dimensions: fixed pay, flexible pay, and benefits.
•
Respondent: sales departments of the cellular service providers in Lahore.
•
Results: Work motivation in the organizations is influenced by the satisfaction of the
employees with their compensation, which is offered by the organization
•
Regression established that there is a strong relationship of compensation with
motivation most employee motivated because of the reward they value (Khan &
Mufti, 2012)
satisfaction
with
compensation
and
work
motivation
22. RELATIONSHIP OF COMPENSATION WITH > TURNOVER
• Management compensation and the intention to turnover for
proprietors at Outback Steakhouse restaurants
• Instrument: mail to all of the 599 general managers of
Outback Steakhouses listed on the company’s web site in the
US
• Result: Compensation had a significant positive relationship
with turnover intentions (Murphy, 2000)
23. RELATIONSHIP OF COMPENSATION WITH >
PERFORMANCE
Compensation effect the quality of an employee’s
performance and the intensity of an employee’s
engagement
(Dur, 2005)
Positive relationship was found to govern rewards and
motivation implying that if rewards being offered to
employees were to be altered, then there would be a
corresponding change dissatisfaction and performance
while the periodic salary increments, allowances, bonuses,
fringe benefits and other compensations on regular and
specific periods keeps their morale high and makes them
more motivated to perform
(Danish and Usman, 2010).
24. • PM provides information for:
PM + TRAINING
PM +
WORKFORCE
PLANNING
PM +
COMPENSATION
SYSTEM
PM + TALENT
MANAGEMENT
(Aguinis, 2009)
26. COMPENSATION IS A STRATEGIC
FUNCTION
Strategic compensation is determining and providing compensation packages
to employees, those are aligned with the business goals and objectives
(Jenny, 2009)
Intention of the organization on rewards policies, processes and practices
required to ensure that it has the skilled, competent and well motivated
workforce it needs to achieve business goals
(Srivastava, 2010)
Strategic compensation is determining and providing the compensation
packages to the employees that are aligned with the business goals and
objectives. Organizations have to take special measures regarding
compensation of the employees so that the organizations retain the
valuable employees. The compensation systems have changed from
traditional ones to strategic compensation systems
(Naukri, 2007)
28. Employment Act, 1955
Purpose
• To provide a number of
minimum benefits for
those workers covered
by the Act and to
establish certain rights
for both employers and
employees.
• All of the benefits is
stated in the contract of
employment.
(Maimunah, 2011)
29. Mandatory Benefits
•
•
•
•
•
Annual leave
Gazette public holidays
Maternity leaves
Medical leave
Termination & Lay off
benefits
Optional Benefits
•
•
•
•
•
•
•
Long Service Payment
Housing allowances
Car allowances
Medical insurance
Bonus
Commission
Retirement benefits
(Malaysia payroll service report, 2009)
30. Employment Act, 1955
Standard term in a contract of
employment:
• Job title
• Wage and detail of the monetary
payment such as allowances and
bonuses
• Normal working hour and overtime
• Holiday and leave entitlement
• Notice period to termination
• Requirement to give exclusive service
• Mobility or transfer
• Penalties which may be imposed in
cases of misconduct
• Other benefits
(Maimunah, 2011)
31. Employment Act, 1955
Examples: Wage
Under this Act, “wage is defined
as a basic wage and all other
payment due under the
contract of service, excluding
- Annual bonus
- Overtime payment
- Commission
- Subsistence allowance
- Travelling allowance
(Maimunah, 2011)
32. Employment Act, 1955
Example: Maternity Protection
• Female employees are entitled
to 60 day’s maternity leave.
• Must serve employers at least 90
days.
• During maternity leave period,
female employee does not
receive wages but entitled to be
paid a maternity benefit or
allowance.
• The amount is equivalent to her
wages.
• Limit to only five child.
(Maimunah, 2011)
33. Compensation system
Relational return
Total compensation
•Recognition & status
•Employment security
•Challenging work
•Learning opportunities
Base
pay
Salary
Merit
pay
Wage
Cash
compensation
Incentive pay
•Bonus
•Commission
•Piece rate
•Profit sharing
Protection
programs
•Medical
insurance
•Life
insurance
•Disability
income
•Pension
•Social
security
Benefits
Pay for time
not work
•Vacations
•Holidays
•Sick leaves
•Maternity
leave
Service &
perquisites
•Recreational
facilities
•Car
•Financial
planning
•Low cost or
meals
(Milkovich, Newman & Gerhart. 2011)
35. CASH COMPENSATION
• Base pay
Wages
• Payment for the
number of hour
worked
Salary
• Salary refers to
monthly rate of
pay, irrespectively
of the numbers of
hours put by an
employee.
(Milkovich, Newman, Gerhart. 2011)
36. CASH COMPENSATION
Merit pay and Cost of living
adjustment (COLA)
• Merit increase are given
as increment s to the base
pay in recognition of past
work behavior
• COLA give the same
increase to everyone
regardless of performance
(Milkovich, Newman & Gerhart, 2011)
37. CASH COMPENSATION
Incentive pay workers are given a
specific production target
• Bonus
• Commission
• Piece rate
• Stock option (granting
employees the right to
purchase as specific number of
shares of the company’s stock
at a guaranteed price during a
designated time period) eg:
Apple, Yahoo, Coca-Cola, Nike
(Srivasta. 2010)
(Milkovich, Newman & Gerhart, 2011)
38. Largest increase in benefits at Oil &
Gas company
* Health plan high because nature of work
(Hayss, 2013)
39. Malaysia budget 2014
Half month bonus or minimum RM500 for all
civil servants to be paid in January 2014.
(Utusan & Malaysian Insider, 2013)
40. BENEFITS
Protection programs
• Medical insurance
• Life insurance
• Disability income
• Pension
• Social security
• Allowance (house, meal, transportation, wedding
at Bharti Telecom)
*In Pakistan insurance policy has not been use
because its very costly (Kumar, 2009)
41. BENEFITS: Pay for time not work
Also called as supplemental benefits
• Vacations
• Holidays
• Sick leaves (out of work due to illness)
• Maternity leave
• Paternity leaves (Yes Bank, HCL Tech-software)
(Milkovich, Newman, Gerhart. 2011)
42. BENEFITS: Service & perquisites
•
•
•
•
Recreational facilities (Chesapeake Energy Corp.)
Car (Google)
Financial planning
Low cost or meals
43. PERKS FOR EXECUTIVE
(privileges granted to employee usually for those in high position)
•
•
•
•
•
•
•
•
•
•
Company car
Company paid parking
First class air travel
Home computers
Children’s education
Mobile phones
Large insurance policies
Country club membership
Personal home repair
Loans
(Srivastava, 2010)
46. SAS Institute, Inc. (software)
•
•
•
•
•
•
Campus recreation
Fitness centre
Olympic size pool
Low cost child care
Unlimited sick days
Free medical centre (four physician, 10 nurse)
(Green, 2013)
47. Chesapeake Energy Corp. (natural gas)
•
•
•
•
•
Day care centre
Scuba classes
Company’s scuba trip to Cozumel, Mexico
Cooking demonstration
Yoga classes
(Green, 2013)
49. • Combination of salary and long-term savings and retirement options
Gen X
(1965-1979)
• Concerned about long-term care, as they have seen their parents go to
assisted living or nursing homes. They want to make sure they are
prepared for long-term care if the need arises.
• Baby boomers tend to see four to five weeks per year of paid time off
• Receive immediate compensation for their contributions
Gen Y
(1980-1999)
• Tend to purchase both disability coverage and life insurance. They differ
from baby boomers by opting to purchase individual home/auto/liability
insurance instead of long-term care
• Only earn one to three weeks paid time off annually.
(Peterson, 2012)
51. What is Cafeteria plan?
• Also called as a tax-advantaged benefits plan because a cafeteria
plan reduces the amount of taxes
• Is an employees benefits plan which allows employees to choose
from a list of options, much like they might choose from a cafeteria
menu (Thierry and Croonen. 2010)
• Some menu of a cafeteria plan: Health insurance, childcare
assistance, life insurance, payments into retirement accounts,
adoption assistance, paid leave, and assistance with care for injured
or disabled family members (NLI. 2007)
• For example, a young woman who is planning on having children in
the near future might choose to put payments toward paid
maternity leave, health insurance, and child care (Heathfield. 2007)
53. Objectives of cafeteria plan in Japan
companies
• Response to rising non-mandatory benefit costs and
diverse employee needs
• Ensuring fairness among employees
• Enhancing corporate image and recruitment
• Fostering a new corporate culture (White. 2009)
54.
55. COMPENSATION MODEL
POLICIES
(foundation on which pay
system are built)
TECHNIQUES
(make up of the system)
INTERNAL ALIGNMENT
OBJECTIVES
INTERNAL STRUCTURE
•EFFICIENY
COMPETITIVENESS
PAY STRUCTURE
• FAIRNESS
•COMPLIANCE
CONTRIBUTIONS
PAY FOR PERFORMANCE
MANAGEMENT
EVALUATIONS
•ETHICS
(Milkovich, Newman, Gerhart. 2011)
59. POLICIES: INTERNAL ALIGNMENT
Definition
Refers to comparisons among jobs or skill levels
inside a single organization
(Milkovich, Newman, Gerhart. 2011)
Internal alignment, often called internal
equity, refers to the pay relationships among
different jobs, skills, competencies within a single
organization (Vandae. 2010)
60. POLICIES: EXTERNAL COMPETITIVENESS
Definition
It is refer to the pay comparisons with the
competitors
(Milkovich, Newman, Gerhart. 2011)
Effects of decisions regarding how
much and what forms:
To ensure that pay is sufficient to attract
and retain employees
To control labor costs to ensure
competitive pricing of products/ services
All pay
decisions must be made without regard to
race, colour, creed, national
origin, religion, sex, sexual
orientation, age, disability or Vietnam-era
veteran status (Ohio State University. 2004)
61. POLICIES: EMPLOYEE CONTRIBUTION
Definition
Employee contributions
-Focus - Relation emphasis placed on employee
performance
- Generation Ys desire to be instantly rewarded for good
performance which is pay for performance (PFP) policies
(Gherson, 2001).
63. MEDTRONIC
Objectives
Internal alignment
-Focus on customer
-Attract and engage top talent
-Recognize personal accomplishment and
share success
-Foster team culture
-Support promotional growth
opportunities
-Reflect job responsibilities
External competitive
-Choice in benefits
-Market value of jobs establishes overall
pay parameter
Employee contribution
-Incentives tied to business goals
-Opportunity to earn above market pay
-Recognition of individuals and team
performance
Management
-Clearly understood
-Employee choice
(Milkovich, Newman & Gerhart. 2011)
65. TECHNIQUE > INTERNAL PAY STRUCTURE
• Pay structure refer to pay rates for a different work
or skills within a single organization.
• The number of levels, the differentials in pay
between the levels and the criteria used to
determine those difference describe the structure.
• Pay structure can be define:
- Number of level work
- Pay differentials between the level
- Criteria used to determine those levels differential
66. Cont….
• Number of level
- One feature of pay structure is hierarchical nature.
- Some are hierarchical with multiple levels and some have a few
levels.
• Differentials
- Pay is varies among employees
- Work that require more knowledge, skills, perform under
unpleasant working condition is usually paid more.
• Criteria: Content and Value
- Work content and value are the most common bases for
determining internal structure.
- Content refer to work performed in a job and how it gets done
(skills required, complexity of task, problem
solving, responsibilities)
- Value refer to the worth of the work (contribution to the
organization objectives)
67. TECHNIQUE > EXTERNAL PAY STRUCTURE
• Refer to pay relationship among organizations. The
objectives is:
- Control cost and increase revenue (the higher the
pay level, the higher the labor cost)
- Attract and retain employees (higher paid
employees are more productive than those at other
companies). It can save recruiting and training cost.
68. Cont…
Competitive pay policy alternatives:
1. Lead
- maximize the ability to attract and retain quality
employees
and
minimize
employee
dissatisfaction with pay.
- High pay level can reduce absenteeism and
turnover (Charles. 2010)
2. Match
- Match paid rates by competitors
3. Lag
- Pay below the market rates
- Can reduces the ability to attract potential
employees
- If it is combined with the compromise of higher
future retain, it may increase the productivity
- Can lead for the other return eg: increase
(Milkovich, Newman, Gerhart. 2011)
benefit
70. TOP PAYING COMPANIES
Average annual base pay: $165, 815
Average annual base pay: $182,394
(Fortune Report, 2013)
71. TOP PAYING COMPANIES
Average annual base
pay: $216,000
For: Associate
Best Companies rank: 82
At this Boston, MA-based law
firm, all attorneys and staff are
eligible for merit-based
bonuses. For associates at its
New York and Washington DC
offices, dinner is on the house
for those working past 7pm.
And on Monday evenings, free
yoga classes are offered.
(TSENG, 2013)
72. TECHNIQUE: PAY FOR PERFORMANCE
• Pay which according to the some measure of
individual or organizational performance
• Pay for performance plan:
- Short term (merit pay, lump-sum
bonuses,
individual
incentives
plan, individuals spot awards)
- Team incentives (Gain sharing, profit
sharing, large group incentives plan)
(Milkovich, Newman, Gerhart. 2011)
73. International Business Machine
Corporation
• Pay for performance, pay competitively, and differentiate
strongly by giving the right dollars to the right people.
• Our approach includes:
- Benchmarking annually to ensure competitive pay
- Using job family to distinguish value of similar skills
- Using geographic data used to understand market value
by geography
- Using a structured framework to track and measure
employee performance allowing managers to assess
relative contributions of all employees and to strongly
differentiate
(IBM Corporate report,, 2013)
74. OBJECTIVES
– Guide the design of the pay system
– Serve as the standards for judging success of the pay
system
– Policies and techniques are means to reach objectives
(Milkovich, Newman, Gerhart. 2011)
75. Cont…
• Efficiency
– Improving performance, increasing quality, delighting customers and
stockholders
– Controlling labor costs
• Fairness
– Fundamental objective of pay systems
– Fair treatment by recognizing both employee contributions, and
employee needs
76. How IBM Ensures Fairness
• Clear message to managers to make sure employees are treated fairly;
Non-discrimination policy mentioned as the managers enter the planning
application
• Base Pay Equity Analysis conducted before the planning cycle to review
women or minority employees who are paid one standard deviation away
from the mean of the majority
– Look for possible reasons for the difference in pay: poor performance,
promoted quickly so it takes time to catch up, had been on an
extended leave of absence
– If appropriate, recommendations are made, giving allocation relief to
managers to correct potential problems that are identified
– Managers must either follow the recommendation or enter a valid
reason for not doing so, which is reviewed
• Factor weightings and assessments helps to rank employees objectively
• Employees may appeal decisions if they do not feel that they are fair
(Amler. 2005)
76
77. Key Factors For Success: IBM
• Management Communications
• Senior management is involved in discussions before
major compensation changes are implemented.
• Employee Communications
• Up line management is involved in the decision making
process with managers in their organization. This
ensures fairness and equity.
(Amler. 2005)
77
78. Cont….
• Compliance
– Conformance to Federal and State compensation laws and
regulations
• Ethics
– Organizations care about how its results are achieved
79. CONCLUSION
A good combination of total compensation able
to attract, retain employees in an organization
Compensation is relatively related with
performance and acceptance of employees
towards the compensation management
A structured and fair compensation management
will create high motivation for the employee to
perform in an organization
80. Best Global Companies to Work For
1,378 employees
What makes it so great?
• Rank: 3
Previous rank: 9
• Thanks hardworking
employees for going above
and beyond in their daily
work, a program he calls
"Catch Someone Doing
Something Right." Employees
are often filled with pride
when they receive a call from
Mendoza, and note that the
program speaks to NetApp's
commitment to creating a
culture of appreciation
(Fortune Report, 2013)
81. Best Global Companies to Work For
6,373 employees
What makes it so great?
• Rank: 2
Previous rank: 3
• With two artists in residence
on staff, the perkfriendly, privately held data
analytics firm takes creativity
seriously. One employee cites
SAS's "creative anarchy" as
conducive to innovation. New
this year: an organic farm for
SAS's four cafeterias.
(Fortune Report, 2013)
82. Best Global Companies to Work For
34,311 employees
What makes it so great?
• Rank: 1
Previous rank: 1
• The Internet juggernaut takes
the Best Companies crown for
the fourth time, and not just
for the 100,000 hours of
subsidized massages it doled
out in 2012. New this year are
three wellness centers and a
seven-acre sports complex,
which includes a roller hockey
rink; courts for basketball,
bocce, and shuffle ball; and
horseshoe pits.
(Fortune Report, 2013)