Principles of Compensation Management Policies and its Objectives.
Compensation is a Human Resources Management activity that concern with all kind of reward that individuals receive for performing organizational tasks. It is basically an exchange relationship. Employees exchange their labour for financial and non-financial rewards. Financial compensation is both direct and indirect. Direct financial compensation consists of the pay an employee receives in the form of wages, salary, bonuses, and commissions. Indirect financial compensation (also called “benefits”) consists of all the rewards that are not included in direct compensation, such as holiday time and healthcare.
From the employees’ views, pay is most important in life. The compensation received from work is one of the main reasons people seek a job. Pay is the means by which they provide for their own and their families’ needs. For some people, compensation may be the main (or certainly a major) reason why they work. Others find compensation a contributing factor to their efforts. But pay can do more than provide for employees’ psychological needs. It can also indicate their value to the organization.
Compensation Policy has the objective to establish and maintain a compensation program that will:
• Attract and retain qualified employees at all levels of responsibility who perform in a manner that permits the College to strive its objectives and goals;
• Reflect the relative value of jobs;
• Be externally competitive and internally consistent and fair;
• Deliver the flexibility (based upon availability of funds) toward employees on the basis of individual performance and contribution to the achievement of college goals;
• Encourage good employee understanding and relationships; and
• Comply with all the laws, State, and Federal Laws and regulations.
Traditionally, the focus of compensation management has been mostly on enabling an organization to recruit and retain employees while complying with legal and statutory requirements. Pay was primarily related to status and hierarchical position. It is now being viewed increasingly as the key to acquire a competitive advantage.
Innovations in compensation are considered necessary to do more with less by reducing labour cost per unit of output, motivating employees to higher performance, providing an impetus to skill development and higher quality and so on.
Some Basic principles
1. The priority level of wages and salaries must be reasonably in line with that happened in the market. The labour market criterion is most commonly used.
2. There should be definite plan to ensure that differences in pay for jobs are based upon variations in job desires, such as skill effort, responsibility or job or working environment, and mental and physical needs.
3. The plan should carefully differentiate between jobs and employees. A job carries a certain wage rate, and a person is assigned to fill it at that rate. Exceptions sometimes occur in very high-level jobs in which job-holder may make the job large or small, depending upon his ability and contributions.
4. Equal pay for equal work, i.e., if two jobs have equal difficulty requirements, the pay should be the same, in spite of of who fills them.
5. An equitable practice should be adopted for the recognition of individual differences in ability and contribution.
6. There should be a clearly established procedure for hearing and adjusting wage complains.
7. The wage must enough to ensure for the worker and his family can afford standard of living.
8. Punctual and right payments of the dues of the employees must be ensured and arrears of payment should not delayed.
According to Murphy (1999), executive compensation has long attracted a great deal of attention from financial economists. Indeed, the increase in academic papers on the subject of Chief Executive Officer (CEO) compensation during the 1990s seems to have outpaced even the remarkable increase in CEO pay itself during this period.
Pearl Meyers ; Partners (2002), directors generally wish to be re-appointed. Average director compensations in the 200 largest United States (U.S) corporations was $152,626 in 2001. In the notorious Enron case, the directors were each paid $380,000 annually (Abelson, 2001). The pay of executives is merely a special case within the topic of compensation, but it does have several twists that deserve attention. First, the base salaries of executives are higher than those of low-level-managers or operative personnel. Second, executives frequently operate under bonus and stock option plans that can dramatically increase their total compensation. A senior executive at General motors, IBM, Data General, or General Electric may in good year earn $500000 or $1000000 or more on top of his base salary. Executives receive perquisites or special benefits that others do not.
How do organizations justify such extraordinary salaries for their executives? The answer is simple: economics and motivation. In economic terms, we know that top managers are expected to delivery good decision making abilities. This skill is not widely held in our society. As a result, the supply of qualified senior executives is scarce, and organizations have bid up the price for this talent. High salaries also encourage both top level-managers to perform well in order to keep their jobs.
The effect of incentive plans on stock returns has been studied extensively. In the earliest of the studies linking financial incentives to subsequent performance, Masson (1971) found that firms provided greater financial incentives for their CEOs exhibited better stock market performance over the post war period. Among financial economists, the dominant approach to the study of executive compensation view manager’s pay arrangements as a (partial) remedy to the agency problem. Under this approach, which be labelled with the “optimal contracting approach”, boards are assumed to design compensation scheme to provide managers with efficient incentives to maximize shareholder value (Lucyan Arye Bebchuk & Jesse M. Fried, 2003).
Retaining and rewarding leadership is a priority issue facing most organizations. Increasing complexity of hiring leadership talent in the face of burgeoning market demand is bringing companies under pressure to retain their top talent. The only way to reward and retain top leadership is by sharing the success of the company with them.
Motivating for high performance need plenty of money. Not everyone can be motivated by money alone, however much. Incentive pay plans should be designed not only to reward good performance but also to minimize the negative side-effects, such as conflict and complaints. At times it is difficult to develop a valid, fair and acceptable means of performance. Many pay plans fail because of either not being suited to the particular situation or because of poor implementation. It is necessary to consider the following aspects before designing a pay plan to motivate performance:
preference of individual employees;
size of pay rewards for high performance;
method of motivating individual job performance;
For effective and sustained motivation, the reward must be on time and immediate. The example of Foxboro has been quoted. In its early days, the company’s very survival depended on technical innovation. Late one evening a scientist walked into the president’s office with a working prototype. The president was dumbfounded by the elegance of the solution and sought to reward him immediately and on the spot. Rummaging through the drawers of his desk, all he could find was a banana and this had to suffice. This was the forerunner of the ‘gold banana’ concept, a very apt and fitting reward. Likewise, Thomas Watson Senior had made a practice of writing out a check on the spot for any unusual achievement that he observed.
Signet is the world’s largest specialty retail jewelery by sales, with stores in the US, UK, Republic of Ireland and Channel Islands.
The Compensation Committee believes that to be effective, compensation policy must be based on sound, clear principles which are well understood and recognize the long term interests of the Group, its shareholders and employees.
Signet’s primary business objective is to deliver results which should consistently outperform the average of the industry sector.
It is recognized that to consistently deliver above industry average performance Signet will need to retain, and where necessary attract, executives of well above industry average ability and leadership potential.
It is recognized that in order to retain or recruit senior executives of the talented necessary to deliver above industry average results, the Group must provide very competitive levels of total compensation. Therefore, the total compensation of Signet’s senior executives will be targeted at the median of industry compensation, with an acceptable range of + or – 10 percentile points. Positioning within this range will be based on performance (both of the Group and the executive), potential (i.e. the executive’s potential to grow in responsibility and performance), and scarcity (i.e. the availability of candidates to replace the executive should he/she leave the Group). As noted in principle (iv) below, when the Group significantly outperforms the industry, the performance based elements of compensation should result in significantly higher total compensation than that achieved by executives in competitor companies.
Total compensation for executive directors and other senior executives should be highly geared towards performance with the proportion of “at risk” pay increasing according to: a) the level of performance achieved, and b) the ability of the executives to influence results. Excluding pension contributions, the provision of a company car and private health insurance, there should only be one element of guaranteed compensation: base salary. The performance related portion of total compensation should separately reward short term performance (through the annual bonus) and long term performance (through share and other long term incentive awards).
Surveys will be undertaken on a regular basis to ensure that total compensation packages remain in the percentile range described in (iii) above. Recognizing that more than 70% of the Group’s sales and profits are generated in the US and that significant compensation differences exist between the US and the UK markets, separate surveys are conducted in each country.
The components of total compensation:
(a) Basic pay
The basic pay of each senior executive reflects the size and scope of his/her responsibilities and is reviewed annually, based upon individual performance, experience, surveyed competitive data and trends and geographic location of each position as well as the movement of basic pay in the Group.
(b) Annual bonus plan
Annual bonus targets are set by the Compensation Committee each year after considering the Group’s current business plans. There is a maximum bonus level set each year on such awards, which is equal to twice the target level, and a threshold performance below which no payments are made.
(c) Share option plans
The Compensation Committee believes that executive share options are an appropriate element of compensation in order to execute the compensation principles set out above, and are an effective tool to incentivize executives to deliver the long term performance needed to generate strong returns to shareholders.
It is the policy of the Compensation Committee that all employees, including directors, who satisfy certain qualifying conditions, should have the opportunity to participate in the equity of the Company. This is achieved through savings-related share option plans, for which invitations are normally made annually. Under the relevant legislation the exercise of these share options is not subject to performance criteria.
(d) Long term incentive plan
The Company has established a Long Term Incentive Plan. The policy to date has been to make annual awards expressed as a percentage of salary with vesting dependent on the achievement of challenging performance conditions set by the Compensation Committee at the time the awards are made.
Why is Compensation Management so important?
1.Compensation management makes a company vigilant. It drives managers clearly the performers who must be given rewards for their efforts, which ultimately decreases the risk of losing a valuable employee.
2.It is positive reinforcement. Yes, money doesn’t make the world go round and if line managers are not friendly, helpful and supportive retention is difficult. But cash prizes and consistent monetary perks in conjunction with a great work environment allow companies to grow by leaps and bounds through motivated, hardworking employees.
3.Compensation management enhances the company’s reputation. When workers are satisfied with their monetary and intangible rewards, they attract better prospects for vacant positions, bringing new, fresh talent to the organization.
The thing that holds most employers back from investing in compensation management is the tediousness of the process. Costly spreadsheet errors and the inability to efficiently process and apply the different ‘rules’ and ‘best practices’ of comp leave organizations hesitant. Software designed specifically for Compensation Management can offer planning support, advice, alerts and real time reviews to simplify, align and automate the compensation planning process.
Before knowing about Compensation management one must know the labour laws of the country which are governing employees’ compensation or remuneration system. International Labour Organisation (ILO) made conventions on labour welfare especially on regularly in payment of wages ; salaries with minimum pay for stipulated working hours. In accordance with the conventions ; recommendations of ILO every country has established labour laws and enforced, whoever contravene them shall be liable for penalty or punishment under serious cases both may be awarded. Naturally judiciary of the concern country is watchdog for dealing labour issues.
For example, India is one of the countries with very high population and stands second in place followed by china. In the India, parliament has enforced four key laws on wages of workers that are Payment of wages act 1936 and Minimum wages act 1948 for the purpose of ensuring minimum payment for particular type of jobs in different sectors and industries according to stipulated working hours prescribed by the law. Normally eight hours is stipulated working time in almost all countries, above stipulated time if any worker is made to work, his employers has to compulsory pay overtime, if not it shall be treated as unlawful by the court of law for which it may impose penalty. Other side of coin it may create serious dissatisfaction among workers and make them feel that they are being exploited which may lead to agitations eventually may lead strikes which is ultimate weapon in hands of workers, ultimately organisations may chose for lockout which is the weapon in hands of employers altogether may create industrial disputes. On this law may support worker agitation for not complying payment of wages by their employer in accordance with wage laws and in some cases law may support employer if workers agitation causes serious damages to organisation.
The most important thing is to note that compensation plays a major role in attracting talent from the market and compensation system of the organisation is Key factor for creating employer brand, which is most important factor for attracting talent people. Having talent people for the organisation is a major asset for the organisation development”
Importance of employees’ compensation or reward system
•Compensation or reward system of the organisation is most influencing factor for employee motivation, must remember.
•If we observe history of causes of industrial disputes, employee compensation a reward system issues were the main reason in most cases.
•A good compensation system of rewards system in the organisation will minimise industrial disputes and helps in maintaining peace and harmony within the organisation.
•Compensation system plays a key role in employee attrition.
•Compensation system mostly influences retention of employee in the organisation.
•Most of employee satisfaction depends upon compensation a reward system of organisation.
•Effective compensation system builds employer brand, which plays a key role in attracting talent.
•Effective compensation system makes employee to put his full efforts for achievement of organisation’s goals and objectives.
•Effective compensation system builds initiative towards work, which in turn enhances the productivity of organisation.
•Effective compensation makes employees feel belongingness towards the organisation.
The HR Compensation Analyst assists with producing the organization’s compensation program. Their primary responsibility is the research and study to determine appropriate employee compensation. In addition, they evaluate predicted market trends, recommend revisions to company compensation plans, review job descriptions, and assist the Compensation Manager.
The HR Compensation Manager directs the organization’s compensation program. Their responsibilities include developing job descriptions, analysis jobs, conducting salary surveys and job evaluations, and establishing a salary structure. They suggest revisions to the compensation plan and procedures, administer bonus and incentive programs, and manage the performance appraisal system.
A majority of human resources professionals appear to believe that employees are likely to over-report the importance of pay in employee surveys. However, research suggests the opposite is actually true. We review evidence showing the discrepancies between what people say and do with respect to pay. We then discuss why pay is likely to be such an important general motivator, as well as a variety of reasons why managers might underestimate its importance. We note that pay is not equally important in all situations or to all individuals, and identify circumstances under which pay is likely to be more (or less) important to employees.
Some employees are motivated by money. In fact, most are motivated by money; at least for their basic needs. Employee motivation through compensation can come in the form of raises, performance bonuses, commissions, profit sharing, or any number of “extra benefits” like, automobiles, vacations, or other tangible items purchased and used as rewards.
Planning & Design: Compensation Philosophy:
What are the advantages or disadvantages of a lead, match or lag compensation strategy?
When developing a compensation structure, an organization’s compensation philosophy will determine how internal pay will compare to external competitors. There are several options when setting pay in relation to the relative market:
Match the market by paying comparable wages.
Lead the market by paying higher wages.
Lag the market by paying lower wages.
Use a combination of these three options.
Match the market
A common compensation strategy for employers is to set pay levels relative to those in the existing marketplace. By matching the pay rates of its competitors, the organization ensures its compensation structure remains competitive, therefore improving its ability to attract and retain top talent. Although this approach allows employers to better manage labor costs, it also has the potential of placing the employer in a position of having to play catch-up, requiring larger adjustments to the compensation structure during tight labor markets.
Lead the market
An employer may choose to offer compensation that is higher than the pay rates in the prevailing marketplace. This compensation strategy may increase the supply of candidates, increase selection rates of qualified applicants, increase morale and productivity, decrease employee turnover or discourage unionization efforts. However, prior to implementing a lead compensation strategy, an organization should identify the expected benefits, keeping in mind that this type of structure will increase overall labor costs. A lead strategy is often most appropriate for organizations located in highly competitive labor markets. Employers that adopt such a strategy will need to monitor it closely to determine whether the anticipated benefits of the strategy are being realized.
Lag the market
Organizations that choose to implement a compensation strategy that lags the marketplace may do so because they simply do not have the financial resources to pay higher rates. These employers may attempt to reward employees in nonmonetary ways to minimize dissatisfaction and turnover. This is not a common strategy as organizations that choose or are forced to set pay rates below the prevailing marketplace are much more susceptible to fluctuations in the labor market, risk greater difficulty in retaining and attracting highly qualified candidates, and typically experience higher rates of employee dissatisfaction, poor performance and turnover. In rare circumstances, an employer may be so highly sought-after due to their brand reputation or other factors that they are able to pay lower wages without realizing this negative impact.
Use a combination of options
For many organizations, a combination of these options may be most appropriate. For example, an employer may choose to lead the market during tight labor markets or only for specific positions that are difficult to fill. This method requires closer monitoring, and pay rates may need to be adjusted regularly. Regardless of the option an organization adopts, the compensation strategy will guide an employer’s decisions regarding internal pay rates relative to the marketplace. There is not one strategy that will work for every employer and organizations will need to ensure the approach they choose matches their mission, vision and culture and supports the overall business strategy.
Top five compensation and benefits trends right now.
There’s a lot going on in the world of compensation and benefits. We’ve seen some long-anticipated trends materialise, including the need for more flexible work arrangements and stronger health and wellness programs, to name a few. We expect to see these themes, along with a few others, continue as we move into the Fourth Industrial Revolution, a period that has launched many deep and thoughtful conversations on thriving in a world that’s rapidly becoming more reliant on digital technology.
Here are some of the key themes we’re seeing so far:
Technology is enabling more and more professionals to change their mindsets about giving up full-time employment for contract-based opportunities that offer greater control over their time, growth, education and job security. This trend is largely being driven by people with bulkier resumes and longer tenures, and is especially prevalent among those working in STEM (science, technology, engineering and mathematics) industries. The job market is filling up with new and exciting endeavours; however, there’s a limited supply of qualified professionals to meet current demand.
Managing employees who may be around for only 6-12 months will require a creative and systematic approach to crafting fair pay and benefits arrangements that will attract, motivate, and protect them. Note that a majority of these employees will be in life stages in which time for family and personal growth will take priority. Even so, their contributions can be vast and game-changing for your organisation.
Engaging contingent workers can reduce overhead costs, especially for tax and infrastructure expenses. Their valuable experiences and insights can introduce much-needed diversity, dynamism, and agility to your business, and provide cost-effective learning and innovation initiatives. Moreover, they could become ambassadors for the culture and brand, which can boost your organisation’s reputation and staffing objectives.
Technology gives compensation professionals increased opportunities to strategize further and determine timely solutions. The concept of having greater flexibility in the workplace has been brewing for a long time, but the administrative demands for implementing custom arrangements were always a minefield. Nowadays, however, with the world changing at a breakneck speed, organisations have to be ever more robust.
A mere ten years ago, digital spreadsheets and automated charts were all it took to enable pay strategies. Now there are powerful compensation software products to help perform this task. These products can not only implement flexible arrangements, but more importantly, integrate seamlessly between systems and processes to enable linkages between job levelling, market benchmarking and compensation analytics. This gives compensation professionals increased opportunities to strategize further and determine timely solutions that bring more value to the organization, all without having to spend countless hours of manual administration.
Hybrid roles, many of which didn’t exist five to 10 years ago, will continue to evolve. Getting pay right for these positions will require an overhaul of the traditional compensation mindset.
Professionals have previously been content to take their salary and expect an across-the-board approach to pay increases and rewards. But as flexibility in the workplace becomes the norm, employees will want their compensation and benefits packages to become more personalised.
Organisations will see analytics that strongly recommend actions to maximise on human capital and will want to consider things such as adopting skills-based performance evaluations; customising pay and benefits to address the employee’s life stage and personal needs; and creating alternative paths to career growth.
It will be worthwhile to revisit your Employee Value Proposition (EVP) and consider creating customised rewards programmes for key talent. Supplementing analytics with employee insights could steer your EVP towards a more meaningful goal for your business and workforce.
Health and wellness
While rapid technological advancements have helped to streamline systems and processes, they have also made the global marketplace even more competitive and demanding. According to our 2016 [email protected] Survey, over 50% of employees say their jobs are a primary source of stress, especially in companies where there is less regard or prioritisation of personal safety, health and wellbeing. Numerous studies have linked workplace stress with various medical conditions, including cardiovascular disease, obesity, diabetes, hypertension, certain types of cancer and mental health issues.
Still, many employers view health and wellness as an individual responsibility, preferring to stick with mostly hands-off approaches like providing medical insurance, sick leave and occasional off-site activities.
There is evidence that management-led health and wellness programmes that are thoughtfully planned and coordinated result in a happier and healthier workplace Successful health and productivity strategies have resulted in 6.5 fewer missed work days, higher engagement, a significant reduction in employees with hypertension and high blood sugar (25% and 24%, respectively), and 50% higher revenue per employee, among many other benefits.
Pay and transparency
Base salary continues to be the number one driver of attraction and retention for employees in Asia Pacific. It’s as crucial as ever to not only get your compensation right, but to ensure you’re communicating openly and honestly about it to your workforce. People know that performance evaluation is a two-way street; and the question of how can you contribute to our bottom line applies to both the employer’s business objectives and the employee’s personal needs.
What factors are considered when determining pay? Is compensation benchmarked against similar roles and skillsets in the market? How is the company doing financially? Can your organisation afford to offer salary increases next year?
Organisations that stick with the old rhetoric of only equating salary to the job and performance rating risk causing confusion for their employees and may appear more unfair or untrustworthy. Employees are more likely to trust and engage with employers who openly communicate and explain their compensation and benefits decisions.
Challenges of Compensation Management
Compensation management is more than providing a paycheck and cost of living increases. In many organizations, employee performance relative to organizational goals serves as the basis for compensation. Whether brought on by economic difficulties, changes in technology or other business factors, compensation remains a human resources challenge.
Forms of Pay
Employee pay begins with a cash base and bonus pay, but may also contain non-cash forms of compensation. The valuation of non-cash compensation is often most difficult for employees to appreciate, but it offers the most opportunity for creativity on the part of the organization.
“All organizations pay according to some underlying philosophy about jobs and the people who do them”, says KP Kanchana, a professor at CFAI National College in Bhopal, India. Compensation programs must consider and value the work of those who provide internal support to the organization as well as those who directly impact financial results. An organization’s compensation strategy will dictate the rate and timing of pay increases, which jobs are eligible for bonuses, and the level of competitiveness with similar organizations.
Pay-for-performance has become increasingly popular. Companies use compensation to reward and boost the morale of high-performing employees, but also to motivate underachievers.
Presentation of Compensation
How a manager speaks regarding pay can inadvertently create ill will when the intention was to deliver good news. It is important to use specifics when speaking with employees rather than categorize any pay increase as “good”, “significant” or some other qualifier. Employee perceptions of compensation are based on individual values, needs and expectations.
Businesses wishing to compete for the best of the available talent pool must offer a competitive compensation program compared to other companies within their industry and at large.
Automation and Outsourcing
Automating compensation, including outsourcing some compensation functions, enables businesses to standardize its system throughout the organization, eliminate paperwork and help departments to communicate more effectively. It minimizes payroll errors and makes it easier to compensate performance based on quantifiable measures. Organizations may also use technology to benchmark jobs and survey employees.
People are living longer, and thus, working longer. In a look at physician compensation, Max Reibolt of The Coker Group noted a difference in work ethic and expected compensation that fell along generational lines. Older workers were more likely to work longer hours in exchange for their pay while younger workers expected high levels of pay even when their productivity was aided by technology.
Multinational corporations must balance the needs and expectations of employees from various countries. Compensation must balance conformity with local laws and customs against global corporate policies.
Controlling Labor Costs
Labor costs often constitute the largest line in a corporation’s budget. In a tight economy, companies are faced with a flat, if not shrinking, pool of funds. The cost of labor is broader than the amount paid to employees, taking into account recruitment, training, turnover, infrastructure and overhead, and the impact of these things on productivity.
Compensation must motivate the employees to contribute their best and it must be fixed as per their needs and aspirations and should be based on their merit. There is need for innovative tools and techniques and strategies in compensation management that customize the individual needs of the employees for ensuring better productivity and performance at the workplace.