Types of Compensation

Compensation is defined as the total amount of the monetary and non-monetary

pay provided to an employee by an employer in return for work performed as
required. Essentially, it's a combination of the value of your pay, vacation,
bonuses, health insurance, and any other perk.
In simple terms, compensation is everything that a company offers its employees
in return for their talent and time

Compensation management depends on the labor laws of the country which are
governing employees’ compensation or remuneration system. International
Labour Organisation 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.
 Compensation and reward strategies

Compensation strategy is essential for employers looking to recruit top talent.

This is especially true for companies who are looking to fill positions that require a
high level of expertise, or those recruiting for brand-new positions within their
organizations. Defining a compensation strategy allows the HR department to
assess whether the compensation package their company offers for given
positions is on-par with the “going rate” for similar positions, and to understand if
adjustments to their compensation strategy are in order.
Imp points in deciding the strategy are as follows:

1. Define your compensation philosophy.

2. Link compensation to your overall business strategy.
3. Change the culture and reinforce it with compensation.
4. Reward the behaviors that drive the results.
5. Examine your budget

Compensation can be divided into Direct and Indirect

1. Direct financial compensation - the pay that a worker receives as wages,

salaries, commissions and bonuses
2. Indirect financial compensation - all financial rewards that are not included
in direct compensation (i.e. benefits).

An example of direct financial compensation is the money the worker receives as

wages at the end of the week, or as a salary paid at the end of the month. Many
companies pay salaries straight into the employee's bank account.

An example of indirect financial compensation is when the company contributes

to an employee's housing subsidy or a pension plan.

An organisation cam develop an effective Compensation and Reward

strategy by doing the following:
✓ Develop Salary Ranges
 ✓ Conducts compensation audits
✓ Plan that will be Supporting Your Overall Business Strategy
✓ Implement good Performance Management System
✓ Rewarding Valuable Employee Behaviors
✓ Effective incentive program
✓ Consider Legal Compliance

The structure of a compensation consists of the following

1. Wage or Salary:
Wage:
The term wage refers to the remuneration paid to the workers appointed on
hourly, daily or weekly basis in return for the service rendered.

Salary:
The term salary refers to remuneration paid to the employees appointed on
monthly or annual basis in return for the service rendered. Thus it refers to
monthly rate of pay irrespective of number of hours put in by employees.

Take Home Salary:

It is the net amount of salary received by an employee after making all the
deductions towards the payment of income tax, LIC premium and contribution to
P.F. etc.

2. Dearness Allowance (DA):

It is given to protect the real wages of workers during inflation. In India it has
become integral part of the wage system.

Under section 3 of the Minimum Wages Act, DA is described as cost of living

allowance. Along with DA other allowances like City Compensatory Allowance
(CCA), House Rent Allowance (HRA), Medical Allowance (MA), Education
Allowance (EA), Conveyance Allowance etc., also form the part of compensation
package.
However, inclusion of all these allowances in the compensation depends on
nature and type of job, contents of job, place of job, terms and condition of
appointment, capacity of employer etc.

3. Incentives:
Incentive is a reward paid in addition to wages whether monetary or not that
motivates or compensates an employee for performance above the standard.
Payment of incentive depends on productivity, sales and Profit of the
organization.

4. Fringe Benefits and Perquisites:

Fringe Benefits:
It is a general term used to describe any of a variety of non-wages or
supplemental benefits that employees receive in addition to their regular wages.
These include such employee benefits as provident fund, gratuity, medical care,
hospitalization, accident relief, paid holidays, health and group insurance, pension
etc.

Perquisites (Perks):
Perquisites also called perks are the special benefits made available only to the
top executives of an organisation. These may include company car, furnished
house, stock option scheme, club membership, paid holidays etc.

Incentives
Incentive pay refers to giving employees bonuses or other forms of compensation
in exchange for going above and beyond their normal duties. It is used as a way to
incentivize employees to continue doing excellent work. A cash bonus toward the
end of the year for the holidays is a common form of this benefit, and some
employees are capable of earning a commission by making sales, which would also
fall under incentive pay. Employers can also reward workers for superior
performance by offering casual incentives. This refers to giving workers non-
monetary items such as gifts or paying for an employee’s lunch.
➢ Profit Sharing
 ➢ Performance Bonuses
➢ Stock Options
➢ Other Incentives

HR professionals can come up with a unique incentive compensation plan as per

the company requirements. The more the HR knows about the employees and the
organisation, the easier it is to tailor a compensation plan aligned with their needs
and wants. It's important to remember that non-monetary benefits, such as extra
vacation days, sometimes can motivate employees more than money.

Incentive pay is a motivational tool used as an additional compensation awarded

to employees for results, they achieved. The main goal of incentive pay is for
employees to remain motivated, work hard and strive for the best possible results.
Employers can often buy pre-made incentive schemes from vendors who are then
responsible for the provision of incentives while the tax liabilities still remain under
the employer domain.

Incentives can be short-term and long-term, which can be tied up with the
performance of an individual employee or a group productivity. The employee’s
first instinct will be to assess the feasibility of the challenge they’ve been set, and
whether it seems fair

Employee incentives and benefits

Incentive programs are powerful tools to motivate and engage employees. HR

professionals must utilize the incentive program to encourage, recognize and
reward exceptional performance in the organisation. Incentive plans typically
surpass standard salary and benefit agreements and usually are given in the form
of extra payment for outstanding performance. Most incentive plans are tied to
earnings. The more revenue an employee generates for a business, the more he
is rewarded through his incentive plan.

List of incentives and benefits

✓ Healthcare.
✓ Education and Development Opportunities
✓ Benefits for commuting ( Free Travel by company transport )
✓ Paid vacations
✓ Retirement programs (give employees regular income after they leave the
company.)
✓ Stock Options
✓ Participation in Management
Advantages of good Incentive and Benefit Program

➢ Increase in productivity
➢ Encourage and build effective teamwork
➢ Retain existing staff
➢ Increase staff motivation, morale and loyalty
➢ Employees will link individual and business performance
➢ It helps in achieving targets and goals
➢ Make employees Feel Valued
➢ Attract new staff to join your business

Change Management.

Change refers to any alteration that occurs in total work environment. Generally
people are accustomed to a well established way of life and any variation in or
deviation from that life may be called a change. Change may be very simple just
like to shift the location of an office or it may be a more complex technological
change which may even threaten the very existence of some people in the
organization.

"The term change refers to any alteration which occurs work environment of an
organization."

To quote another definition "When an organizational system is disturbed by some

internal or external force, change frequently occurs. Change, as a process, is simply
modification of the structure or process of a system. It may be good or bad, the
concept is descriptive only."
Forces for change

There are a number of factors both internal and external which affect
organizational functioning. Any change in these factors necessitates change in an
organization. The more important factors are as follows :

A. External Forces

1. Technology
2. Marketing Conditions
3. Social Changes
4. Political Forces

B. Internal Forces

1. Nature of the Work Force

2. Change in Managerial Personnel
3. Deficiencies in Existing Management Structure

HR's role
HR can play a dual role in change management by initiating and leading the change
and by serving as a facilitator for changes that other leaders and departments
The HR department performs a variety of functions associated with the
communication, implementation and tracking of major changes. Most commonly,
HR professionals assist employees by serving as a point of contact for questions and
concerns and by explaining any impact on staffing. In addition, HR often
coordinates meetings and communications about the change and related
initiatives. Other common HR roles and responsibilities include:

▪ Providing initial employee communications about changes.

▪ Developing training programs.
▪ Preparing informational documents.
▪ Assessing readiness before the change.
▪ Analyzing potential impact.
Steps in the Change Management Process
1. "Create a sense of urgency."
2. "Build a guiding coalition."
3. "Form a strategic vision and initiatives."
4. "Enlist a volunteer army."
5. "Enable action by removing barriers."
6. "Generate short-term wins."
7. "Sustain acceleration."
8. "Institute change."

Interventions / Models

Lewin’s Three Step Change Model :

The model, also known as Unfreeze-Change-Refreeze, comprises a three-stage

process of 1) unfreezing, 2) changing and 3) re-freezing.

1. Unfreezing: This stage involves creating the right conditions for change to occur.
By resisting change, people often attach a sense of identity to their environment.
In this state, alternatives, even beneficial ones, will initially cause discomfort. The
challenge is to move people from this 'frozen' state to a 'change ready' or 'unfrozen'
state.

2. Changing /Movement: The transitional 'journey' is central to Lewin's model and

at the psychological level it is typically a period of confusion. People are aware that
the old ways are being challenged, but there is no clear understanding of the new
ways which will replace them. As roles change, a reduced state of efficiency is
created, where goals are significantly lowered. Good leadership is important, and
coaching, counselling or psychological support may be needed. The end goal of this
stage is to get people to the 'unfrozen' state and keep them there.
3. Refreezing: The end goal of the model is to achieve a 'refreeze', re-establishing a
new place of stability and lift comfort levels by reconnecting people back into their
safe, familiar environment. Refreezing takes people from a period of low
productivity in the transitional state to a stable and productive state.

Model of Change: 1. Establishing a sense of urgency 2. Developing a guiding group

3. Creating a new vision 4. Communicating new vision 5. Removing obstacles to
the new vision 6. Creating short term successes 7. Declaring victory 8.
Implementing the change
 Kotter`s eight- step plan

John Kotter was a leadership and change management professor at Harvard

Business School He introduced his ground-breaking 8-Step Change Model in his
1995 book, “Leading Change”. Built on the work of Kurt Lewin, the model sets out
the 8 key steps of the changes process, arguing that neglecting any of the steps can
be enough for the whole initiative to fail.
Step One: Create Urgency

The idea of a change being necessary for the success of the organisation can be
very powerful. If you can create an environment where individuals are aware of an
existing problem and can see a possible solution it is likely support for the change
will rise. Generating conversation about what is happening and what direction the
organisation could go in will help to achieve this. One way to kick-start this is to
create a forum where issues and potential solutions are raised and discussed. This
step is all about preparation and Kotter estimates that roughly 75% of a company’s
management needs to be behind a change for it to be successful. This emphasizes
his point that it is important to prepare well before jumping into the change
process. This step creates the 'need' for change, rather than just a 'want' for
change. The difference is very important when it comes to the likely support and
eventual success of the change.

Step Two: Form a Powerful Coalition

It will be very hard to lead the whole change process on your own, and therefore it
is important to build a coalition to help you direct others. The coalition you build
should be made up of a range of skills, a range of experience and people who come
from different areas of the business, to maximise its effectiveness. The coalition
can help you to spread messages throughout the organisation, delegate tasks and
ensure there is support for the change organisation-wide. Team members that
collaborate, complement each other and can drive each other to work harder will
make your life easier and the change more likely to be successful.

Step Three: Create a Vision for Change

A change initiative is likely to be very complicated and can often be hard to

understand, in particular for employees at the lower end of the hierarchy. For this
reason, creating a vision that is easy to understand and encapsulates the overall
aim is a useful way of generating support from the whole organisation. While this
vision should be simple and understandable, it also needs to be inspirational to
have maximum effect.
Step Four: Communicate the Vision

Creating the vision is not enough to generate support for it, it then needs to be
communicated throughout the organisation. This is an excellent opportunity to
utilize the coalition you have built up, as between them they are likely to have
networks in every area of the business. It is important to continuously
communicate this message as it is likely that competing messages are also being
spread.

Step Five: Remove Obstacles

The first four steps are essential in building the strength of your change initiative,
but it is also important to look for what is likely to reduce its chances for success.
Whether its individuals, traditions, legislations or physical obstacles, it is likely there
will be a few barriers blocking your change’s path. Identify these as early as possible
and rely on available resources to break them down, without disrupting any other
areas of the business.

Step Six: Create Short-Term Wins

Change processes often take a while to reap any rewards and this can cause
support to fall if individuals think their effort has been wasted. For this reason, it is
important to demonstrate the advantages of the new process by creating some
short-term wins. Shorter term targets are also useful tools for motivation and
direction. Using these wins to justify investment and effort can help to re-motivate
staff to continue backing the change.

Step Seven: Build on the Change

Many change processes fail as complacency creeps in towards the end and project
are not finished properly. Therefore, Kotter argues it is important to sustain and
cement the change for long after it has been accomplished. Keep setting goals and
analysing what could be done better for continued improvement.
Step Eight: Anchor the Changes in Corporate Culture

Simply changing the habits and processes of employees is not always enough to
instill a culture change across the organisation. The changes should become part of
the core of your organisation to have a lasting effect. Keeping senior stakeholders
on board, encouraging new employees to adopt the changes and celebrating
individuals who adopt the change will all help to promote the change to the core
of your organisation.

The main reason that Kotter outlines these steps is to emphasize that change is
not a simple and quick process. Many steps of planning are required and even when
the change has been implemented there is still a lot to do to ensure it is successful.
Kotter argues that 70% of change initiatives fail, and attributes this to the fact that
most organizations do not put in the necessary preparation or see the project
through correctly. Following these steps ensure your change initiative is more likely
to be a long-term success.
Burke-Litwin: Understanding Drivers for Change
There are many reasons that change occurs in organisations. Building on the Burke-
Litwin model of organisational change and performance, This note will help you
identify different drivers of change and consider the implications for you as a
change /HR manager.
The Model
The Burke-Litwin model shows the various drivers of change and ranks them in
terms of importance.
The model is expressed with the most important factors featuring at the top. The
lower layers become gradually less important.
IMP: The model argues that all of the factors are integrated (to greater or lesser
degrees). Therefore, a change in one will eventually affect all other factors.
Burke-Litwin believe environmental factors to be the most important driver for
change. Indeed, most change can be traced back to external drivers for change.
Important elements of organisational success, such as mission and strategy,
leadership and organisational culture, are often impacted by changes that originate
outside the organisation. It is HR job to understand these external changes and
identify the implications for the team.

Identifying and Dealing with Drivers for Change

1. External Environment
This includes such factors as markets, legislation, competition and the economy. All
of these will have consequences for organisations, and, as a change manager, it is
vital that you continually scan the environment for issues that will affect you and
your team. For example, in the world of accountancy, International Accounting
Standards and International Financial Reporting Standards will have a significant
impact on the way companies manage their accounts and report their results. In
the public sector, legislative changes across health, local government and other
services have a direct impact on the work organisations are required to carry out.
2. Mission and Strategy
An organisation’s mission articulates its reason for existing. It is the foundation
upon which all activity should be built. The strategy then sets out, in broad terms,
how the organisation will go about achieving its mission. Very often, the strategy
will be developed in light of environmental change, and will have a significant
impact on the work you do. As a change manager, you need to understand change
in strategy and be able to communicate the implications to your staff.
3. Leadership
This considers the attitudes and behaviour of senior colleagues and how these
behaviours are perceived by the organisation as a whole. The way in which change
is implemented and accepted through the organisation will be largely influenced
by the top team. Does your team believe that senior colleagues are committed to
change, or is it just another initiative that will disappear in six month’s time?
4. Organisation Culture
Organisation culture can be described as “the way we do things around here”. It
considers the beliefs, behaviours, values and conventions that prevail in an
organisation. Culture change does not happen overnight. It evolves over time as a
result of many other changes in the organisation. As a manager, you should keep
in mind the desired state for the organisation, in terms of how you expect people
to behave (and not to behave), and what your organisation values as important.
You need to ensure that your behaviour fits with these expectations at all times.
5. Structure
Very often, changes in strategy can lead to changes in the way the organisation is
structured. This can impact on relationships, responsibilities and ways of working.
Your job is to assess the impact of the structural change and ensure your team
understands why it is required, and what it means for them.
6. Work Unit Climate
This considers employees’ perception of their immediate colleagues and working
environment. Our immediate working environment is often what shapes our view
of the organisation as a whole, and influences the extent to which we feel satisfied
in our jobs. Changes to the immediate working environment need to be managed
sensitively, as they are likely to invoke a range of emotional and political responses
from staff. This is particularly the case where change involves moving location, a
change in personnel, or a change in terms of conditions of service, such as working
hours.
7. Task Requirements and Individual Skills/Abilities
Change at a higher level in the organisation will often require changes in the work
carried out and the skills available in the team. As the change manager HR need to
assess whether: all the right skills are in place; if they can be developed; or, if you
need to bring them in from outside the team.
8. Individual Needs and Values
Changes to team membership can mean a change in the team dynamic. In a perfect
world, we would be able to recruit the exact fit for our teams, in terms of personal
style, abilities and skills mix. However, in reality it is not always possible, and it is
HR job to identify any risks in this areas and mitigate them as best you can.
9. Employee Motivation
Considers the significance of individual and organisational goals. Motivation is key
to effective change. The real challenge is to maintain motivation throughout a
change project, particularly when change is often not well-received by those
affected.
Burke-Litwin change model • The Burke-Litwin change model revolves around
defining and establishing a cause-and-effect relationship between twelve
organizational dimensions that are key to organizational change.
 Internal branding and relation to compensation
Internal Branding

Every company has a reputation. Its reputation can also go beyond to inspire a
specific perception — emotional, instinctive, and intellectual — in the people who
see your ads, use your products, and eventually, speak to others about you. That
reputation is known as your brand, and it can be a powerful, mysterious, and
synergistic force.

The company also has a second brand related to its primary brand about how
you’re viewed as an employer. This is your employer brand, and it lives and
breathes in the minds and hearts of your former, current, and future employees.
Employees have to be related to the brand

In today’s increasingly competitive job market, a positive employer brand is

critical. Without one, hiring and retaining the best employees becomes
challenging — and costly. You need talented, leadership-bound workers to drive
your business forward, and the best way to find them is to cast the impression
that your company is a great place to work. Everything from the salary and
benefit packages you offer to advancement opportunities to weekly happy hours,
the culture of an organization and the treatment of its employees can greatly
impact the org image
The ultimate goal of internal branding is the same as it is for external branding
which is to generate brand equity. The brand equity is often considered intangible
— for consumers, it's the impact a brand has on purchasing decisions driven by
customer perceptions of company practices and products. Internally, brand equity
comprises the alignment of stated brand goals with their actual implementation
along with the ability of companies to embrace their own brand.

Research highlights the value of successful internal branding across three key
areas:

Retention —Establishing a consistent internal brand has a positive impact on

brand identification among employees. This, in turn, helps improve overall staff
retention rates. And it also drives cost savings: On average, staff turnover costs
companies a large percent of the lost employee's salary as they onboard, train
and acclimate new workers.

Engagement —Internal branding both improves job satisfaction and staff loyalty,
which in turn drives greater productivity: Engaged employees are more
productive, generate higher sales and are not absent.

Corporate Identity —Effective internal branding can help overcome resistance to

corporate-scale branding efforts, in effect using an "inside-out" identity
development strategy to align staff culture with long-term branding goals.

While the concept of brand equity may be intangible, the benefits are
quantifiable, Consumers attach more value to products made by companies that
create high brand equity — internally, these tangible benefits take the form of
increased retention, engagement and productivity.

The employer brand and value proposition is related to compensation perks and
benefits. A good brand draws more attention and more customers, enabling
organizations to pay better remuneration.

Employee Branding also help the Organizational Branding ( Employer Branding )