Compensation Management


KP Kanchana
Faculty OB/HR
ICFAI National College

Compensation Management is an integral part of the management of the organization.
Compensation Management contributes to the overall success of the organization in several ways. To be effective, the managers must appreciate the value of competitive pay, their human resources, and have an investment view of payroll costs. We want to maintain pay levels that attract and retain quality employees while recognizing the need to manage payroll costs.

Pay is a difficult topic of conversation in most organizations. In fact, the topic is altogether taboo in many workplaces. It simply isn't discussed unless absolutely necessary. And, when it is necessary, such as when a pay raise (or lack of one) must be explained to an employee, many managers find themselves at a loss for words. As the dreaded date of such a discussion approaches, managers may begin checking their sick time banks to see if they can disappear for a day or two.

While it may be a touchy subject, pay is a critical factor in the work lives of employees. Jobs are accepted or rejected based in part on starting salary and the opportunity for future increases in pay. Employees compare their pay to that of others in the same line of work. They constantly compare their pay level to their level of contribution, trying to determine whether the ratio of give and receive is a fair one. While it may not be a frequent topic of open discussion, employees think about pay often.

Approaches of compensation management

There are 3P approach of developing a compensation policy centered on the fundamentals of paying for Position, Person and Performance. Drawing from external market information and internal policies, this program helps establish guidelines for an equitable grading structure, determine capability requirements and creation of short and long-term incentive plans.

The 3P approach to compensation management supports a company's strategy, mission and objectives. It is highly proactive and fully integrated into a company's management practices and business strategy. The 3P system ensures that human resources management plays a central role in management decision making and the achievement of business goals.

* Paying for position
* Paying for person
* Paying for performance

Because it is so important to employees, the issue of pay deserves to be clearly addressed. In spite of their hesitance, managers are capable of dealing with this sometimes difficult issue in a professional and effective manner. By keeping the following basic points about pay in mind, they can address virtually any pay-related topic with their employees in a professional and productive manner.

Specificity is Key

Pay is a topic with many different shades and a variety of implications. Whenever approaching the subject, it is important to work out the details beforehand so that specifics can be clearly communicated. For the manager, this means that the increase amount is nailed down before discussing a promotion with an employee. No chance of misunderstanding or false expectations can be permitted. Far too often, managers are apt to discuss generalities. "It will mean a good increase." What exactly does that mean in terms of the employee's monthly budget? If care is not taken here, good news can become the source of conflict and resentment.

By the same token, if asked for a raise, the manager should request that the employee suggest a specific number that he believes reflects his value. Once the employee provides that number, the manager can do his homework and decide what, if anything can be done. The employee can then be given a definitive response.

Pay is Relative

What one employee considers a fantastic increase maybe an insult to another? Each individual has a unique set of creativity and competencies. Pay should be based on the performance, position and the competencies/skills the person is having.

Pay is Not Created Equal

Various forms of pay have different purposes. The two most common forms of direct cash compensation in most companies are base pay and bonus. Base pay is the annual salary or hourly wage paid to an employee given the job he holds, While bonus is typically (or at least should be) rewarded based on the achievement of a goal of the organization.

Discussions about bonus payments should be as specific as possible. This is the opportunity to point out particular accomplishments that contributed to overall team or company success. Even if the bonus is paid to all employees based on a simple overall company profit target, the manager should use the opportunity to point out specifically how individual employees helped achieve that target.

Distributing bonus checks presents a unique motivational opportunity for a manager. Handing money to an employee while discussing actions and behaviors he would like to see repeated, creates a powerful link between performance and reward.

Discussions about base pay increases can be a bit different. Most companies claim to link their annual base pay increases to performance. In reality, however, base pay decisions take into account a variety of factors, including the relative pay of others in the same job, the company's increase budget, market practices and where the individual falls within his pay range. Even when performance is a factor, the manager is faced with the difficult task of evaluating an entire year's worth of activity and then categorizing it according to the percentage increase options allowed by the budget. It becomes very difficult to pinpoint specific employee actions or accomplishments as the reason for the increase.

For these reasons, it's appropriate for the discussion about base pay increases to be more general and balanced. Both strengths and weaknesses of the employee should be addressed. The actual increase is then based on an overall assessment, as opposed to a link with one or two specific outcomes. Any other factors that impact the increase percent, such as budget or pay range should be openly discussed as well.

'Why?' is Critical?

All organizations pay according to some underlying philosophy about jobs and the people who do them. This philosophy may not be in writing, but it certainly exists. Pay maybe treated in a formal and structured manner at one company. At another, any appearance of structure is intentionally avoided so that decisions can be made arbitrarily. Either way, the approach taken reflects a fundamental belief about people, motivation and management.

Managers often want to view each individual as a separate case. It is important to understand, however, that employees operate within a compensation system. A manager is wise to take the time to learn as much as possible about his company's compensation system. This knowledge will form the context for pay discussions and will go a long way toward helping the employee make sense of what is said.

While the answer to "how much?" is of course important to employees, they are also concerned about the "why?" of pay. In other words, while the actual amount of pay is very important, employees also are interested in the rationale used to determine it. Research has shown that pay satisfaction increases with understanding of the pay scheme.

Managers often leave this area to the HR department. Ideally, however, managers themselves will be the primary conduit of information on this topic. If a manager does not know the company's pay philosophy, he should seek out whomever in the organization is responsible for pay administration and get the answers he needs.

Is pay based on an analysis of market pay practices? Is it affected by the bonus plan? Are certain jobs considered critical and, therefore, treated differently? Do pay decisions take training and education into account? Answers to these questions will help managers help employees understand the organization's philosophy and the decisions resulting from it.

Job seekers who go into the negotiation process with their eyes wide open keep an important fact in mind: A few thousand dollars one way or the other can quickly become a gain or a loss depending on other benefits. Money is important, but it must be put in the context of other pros and cons--some of which have a dollar value and some of which do not.

The company's health plan, bonus plan, life insurance benefit match are just a few of the rewards with a dollar value. Beyond these, but just as important, are factors such as career development, camaraderie among teammates, flexible schedules, etc. Ask employees in a lousy work environment, and they will testify that these factors should never be understated.

Managers should be the company's biggest ambassadors when it comes to the value of benefits and work environment factors. Sharp companies do a good job of showing the value of these items. Smart managers will communicate their value, as well, especially when discussing pay. For example, when offering a promotion to an employee, a manager should consider all the potential benefits. What developmental opportunities are involved? Is there an increase in status? Will the move mean additional interaction with key players? All of these, as well as any increase in tangible pay and benefits should be discussed.

Speaking of Pay with Confidence

Discussions regarding pay do not have to be awkward--they can be clear and productive if managers adhere to the basics outlined above. Rather than a taboo, pay can be addressed in an up-front manner if managers do their homework, get prepared and go into the discussion with the confidence that comes from knowledge.

Pay discussions should deal with specifics. In preparing for the discussion, the manager must remember that pay is relative and nothing can be assumed about the employee's response. The purpose of the particular aspect of pay being addressed is important, and the manager must be able to discuss the issue in the context of the organization's pay philosophy. Finally, the many faces of reward in the workplace cannot be overlooked.

If managers follow these guidelines, their pay-related communication with employees will result in clarity and respect. In addition, they will avoid the misunderstanding and resentment that results from avoiding this critical issue.

To conclude we can say that compensation is a hot potato for the Human Resource Department. The motivation level of the employees to great extent lies in monetary rewards. If paid well can generate results for the organization, failed can create problems. The major challenges what managers face today is retention of the man power and the major cause of it is that they are paid better in the other organizations. A satisfied employee is a productive employee and care should be taken that they are fairly paid for their worth in the organization.

KP Kanchana
Faculty OB/HR
ICFAI National College

Source: E-mail November 3, 2006


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