November 3, 2012

MU0015 [Compensation Benefits] Set1 Q1

Q.1 Discuss the element of compensation?
Q2. What are the elements of compensation? 

Ans:

Compensation refers to money and money-related extras. Thus, in addition to a person’s base pay, compensation can include bonuses, merit increases, variable pay, and long-term Incentives. Benefits include the remaining things, such as healthcare, pension plans, stock options, and legal services.

An organisation’s compensation program sends a message to employees about its commitment to encouraging, recognising, and rewarding employee performance. While money should certainly never be the only motivator, it is definitely important. To be successful, a compensation program must link employee performance with business performance. Employees have to understand what the company expects of them, why the company expects it and the possible rewards when performance expectations are met. Taking this approach in preparing the pay structure provides an ownership context for employees, knowing they are important to the ongoing success of the organisation, and that if they do their part well, they will share in the rewards generated by that success. Let us now look at some of the most common elements or components of Compensation and Benefits.

Identifies target market position for competitive pay levels and articulates the company s commitment to motivating, and rewarding employee contribution and performance through the various elements of the company s total pay system.

Elements of compensation
Let us first discuss the elements of compensation and later we shall discuss what goes into ‘benefits’.

The primary elements of a compensation package are:

Base pay: Base pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignment of a job. Pays for standard job duties, skills and results. Should be designed to reflect competitive rates for comparable jobs within identified marketplace.

Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this, organisations must first identify their competitive market. This can be achieved by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Next, they need to conduct an assessment of market pay practices for similar jobs within the recognised competitor group. This assessment should involve the duties, skills, and impact levels of each job evaluated – that is, each job of similar size and scope.

Then a pay structure for managing the competitive base-pay levels for the jobs throughout the organisation should be developed. Pay structures typically consist of a series of pay ranges or bands that reveal competitive rates of pay for specific jobs, as well as allowing room for salary growth. Jobs of similar value from both the market point of view and an internal point of view are grouped together. Then a competitive pay range is developed around the market rates for the particular jobs.

Variable pay: Performance-based variable pay continues to achieve momentum as a more successful way to identify and reward employee performance. Also known as pay-per-performance, variable pay is popular in today’s corporate world. By including a percentage of variable pay in the compensation plan, organisations ensure that two people with different efficiency levels do not get the same benefits. By doing this, the company rewards productivity and hard work and motivates the under-performers to work hard. Once limited to senior management levels, these incentive or bonus plans are being redesigned to reward the achievement of specific company or employee performance objectives.

In a variable pay plan, the size of the award varies among employees and from one performance period to another, based on levels of achievement measured, as well as against pre established company and employee performance targets. Amounts are usually calculated as a percentage of base pay depending on job category and position. Rewards are normally paid in cash on an annual, semi annual or quarterly basis depending on the plan design. Plan designs range from sales-commission types to individual incentive or bonus plans to team awards. The main idea of these programs is to reward innovation and hard work and to discourage mediocrity in performance.

Skill and competency-based pay: Skill-based pay offers employees extra compensation when they have new skills specially recognised by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs but are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviours and personal attributes. It helps out employees to grow in the company and helps them to close the knowledge gaps needed for creative moves.

Long-term incentive compensation: Long-term incentive compensation vehicles, such as stock-option plans and other deferred-compensation plans, which are not usually used to reward performance, are achieving desirability among employees. These long term incentive compensation plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are a common form of long-term compensation at public organisations. In most private companies, incentives that reflect stock plans are used for key employees.

Long-term compensation plans can be valuable preservation tools for the success of an organisation. They help to focus on driving and improving the key employees to achieve the financial performance of the company over a longer term.

Performance Based Variable Pay:
Designed to reward achievement of specific company and/or individual performance objectives. Payouts vary based on company and/or individual achievement. 
Types of variable pay plans include:• 
*Skill pay
*Incentive pay/bonus plans 
*Commission
*Gain sharing/results sharing

Long Term Incentive Compensation:
Designed to reward long term company performance. Individual job level/performance may impact eligibility to participate. Can be an effective retention tool.

Benefits  Broad range of practices including health insurance, vacation, leave policies, and retirement and savings plans. Designed to address health and welfare needs of employees. Can send strong messages about company culture and values.

Perks & Non-Cash Rewards
Used to recognize exceptional contribution, performance, commitment to culture and values. Variety of methods including additional time off, tickets to events, trips, dinners, public recognition, etc.

Intrinsic Rewards: 

*Performance Feedback Management
*Development Opportunities
*Work Environment

Processes used to communicate and align employee behaviors with business priorities and company values to achieve desired results. Play a significant role in successfully engaging full scope of skills and abilities within the workforce. Critical in retaining key talent.

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