Chapter- 11: Compensation
Dr. Parul Akhter
Professor & MBA Coordinator
School of Business
Ahsanullah University of Science and Technology
141-142 Love Road, Tejgaon Industrial Area
Dhaka-1208, Bangladesh
Compensation
• Compensation means the reward that is received by an
employee for the work performed in an organization. It
is an important function of human resource
management. Employees may receive financial and
non-financial compensations for the work performed by
them.
• According to Dale Yoder, “Compensation is paying
people for work”.
• “Compensation is what employees receive in exchange
for their contribution to the organization”. – Keith Davis.
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Compensation management
• Compensation Management is the process of designing,
implementing, and maintaining a structured system to ensure
employees receive fair, competitive, and equitable pay and benefits for
their work. It involves determining salary structures, incentives,
bonuses, benefits, and other forms of remuneration to attract,
motivate, and retain employees while aligning with an organization's
strategic goals and financial capabilities.
• Key Components of Compensation Management:
[Link] Pay: Fixed salary or hourly wages provided to employees.
[Link] & Bonuses: Performance-based pay to motivate
employees.
[Link] & Perquisites: Health insurance, retirement plans, paid
leave, etc.
[Link] & Fairness: Ensuring internal and external pay equity.
[Link] Compliance: Adhering to labor laws and regulations.
[Link] Strategy: Aligning pay structures with business goals.
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Explain the various classifications of
rewards
• Rewards in compensation management refer to the various benefits, incentives,
and remuneration given to employees in return for their contributions to an
organization. These rewards can be classified into different categories based on
their nature and purpose.
• 1. Intrinsic vs. Extrinsic Rewards
• A. Intrinsic Rewards (Non-Monetary, Psychological) : Rewards that come
from within an individual and are related to job satisfaction and personal
fulfillment.
• Examples:
• Recognition & Appreciation: Verbal praise, awards, and public acknowledgment.
• Job Enrichment: Opportunities for skill development, autonomy, and creativity.
• Personal Growth & Achievement: Career advancement, training, and self-improvement.
• Work-Life Balance: Flexible working hours, remote work options.
• B. Extrinsic Rewards (Tangible, Monetary & Non-Monetary) : Rewards
provided by the organization in the form of financial or material incentives.
• Examples:
• Salary & Wages: Fixed base pay.
• Bonuses & Incentives: Performance-based financial rewards.
• Employee Benefits: Health insurance, retirement plans, paid leave. 4
• Perks: Company car, free meals, gym memberships.
• 2. Monetary vs. Non-Monetary Rewards
• A. Monetary Rewards (Financial Compensation) :
Rewards that have direct financial value.
• Examples:
• Base Pay (Salary/Wages): Fixed compensation based on
role.
• Variable Pay: Bonuses, profit-sharing, stock options.
• Overtime Pay: Additional earnings for extra work hours.
• B. Non-Monetary Rewards (Intangible,
Motivational) : Rewards that do not have direct
financial value but enhance job satisfaction.
• Examples:
• Recognition Programs: Employee of the Month, appreciation
certificates.
• Work-Life Benefits: Flexible work schedules, paid time off.
• Career Development: Training, mentorship, skill 5
enhancement.
• 3. Direct vs. Indirect Rewards
• A. Direct Rewards (Cash-Based Compensation)
• Definition: Direct financial compensation given to
employees.
• Examples:
• Salaries & wages
• Commissions
• Bonuses & incentives
• B. Indirect Rewards (Benefits & Perquisites)
• Definition: Additional non-cash benefits that
contribute to overall compensation.
• Examples:
• Health Benefits: Medical insurance, dental plans.
• Retirement Plans: Pension schemes, provident funds.
• Paid Leave: Vacation, maternity/paternity leave. 6
Define the goal of compensation
administration
• The primary goal of compensation administration is to develop
and manage a fair, competitive, and strategic compensation system
that attracts, motivates, and retains employees while aligning with
an organization's financial capacity and overall business objectives.
• Key Goals of Compensation Administration:
[Link] & Equity:
• Ensure internal equity (employees in similar roles are paid fairly within
the organization).
• Maintain external equity (compensation is competitive with industry
standards).
• Prevent pay discrimination and ensure compliance with labor laws.
[Link] & Retain Talent:
• Offer competitive salaries and benefits to attract skilled employees.
• Provide career growth opportunities and long-term incentives to retain top
talent.
[Link] & Reward Performance:
• Implement performance-based incentives (bonuses, merit pay) to boost
productivity.
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• Recognize and reward employees for outstanding contributions.
4. Compliance with Laws & Regulations:
Adhere to labor laws, tax regulations, and employee rights legislation.
Avoid legal risks related to wages, benefits, and equal pay.
5. Cost-Effectiveness & Sustainability:
Ensure compensation strategies align with organizational financial goals.
Balance employee satisfaction with budget constraints.
6. Enhance Employee Satisfaction & Engagement:
Provide both monetary and non-monetary benefits (work-life balance,
recognition programs).
Improve job satisfaction, reducing turnover and absenteeism.
7. Support Organizational Goals & Strategy:
Align compensation policies with the company’s mission, vision, and business
growth strategies.
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Foster a high-performance culture through well-structured rewards.
Discuss job evaluation and
three basic approaches
• Job Evaluation is a systematic process used to determine
the relative value of jobs within an organization. It helps
establish a fair and equitable compensation structure by
assessing the responsibilities, skills, effort, and working
conditions associated with each job. The three basic
approaches to job evaluation are:
(1) Ordering method: The Ordering Method (also known as
the Ranking Method) is one of the simplest job evaluation
techniques used to determine the relative value of jobs
within an organization. It involves ranking jobs from highest
to lowest based on their overall importance, complexity, and
responsibilities.
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(2) Classification method: The Classification
Method is a job evaluation technique that groups
jobs into predefined categories or grades based
on their duties, responsibilities, and required
skills. Each grade has a specific pay range to
ensure fairness and consistency in
compensation.
(3) Point method: The Point Method is a
quantitative job evaluation technique used to
determine the relative value of jobs within an
organization. It assigns numerical points to
specific job factors (such as skills,
responsibilities, and working conditions) to
establish a fair and equitable pay structure.
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Factors Influencing
International
Compensation
• Several factors impact compensation strategies across different
countries:
Economic Conditions: Inflation rates, cost of living, and wage
levels affect pay structures.
Legal & Regulatory Framework: Minimum wage laws, tax
regulations, social security contributions, and employment contracts.
Cultural Differences: Attitudes toward pay equity, benefits, and
non-monetary rewards vary by region.
Labor Market Conditions: Demand and supply of skilled labor
influence salaries.
Exchange Rates & Currency Fluctuations: Multinational
companies must manage payroll in multiple currencies.
Company Strategy & Global Policies: MNCs (Multinational
Corporations) must balance standardization with local adaptation.11
Approaches to International Compensation
• Global organizations adopt different compensation structures to address
cross-border differences:
• A. Home-Country Based Approach
• Employees are paid based on their home country salary structure
and adjusted for international assignments.
• Common for expatriates (employees assigned abroad).
• Example: A U.S. company sends an employee to China but continues to
pay them based on U.S. salary standards.
• B. Host-Country Based Approach
• Compensation is set according to the local market and legal
requirements of the country where the employee is working.
• Used for local hires and long-term international employees.
• Example: A German company hiring employees in India will follow Indian
salary norms.
• C. Balance Sheet Approach (Most Common for Expatriates)
• Ensures employees maintain the same purchasing power as in their
home country.
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• Adjustments for cost-of-living, housing, taxes, and hardship allowances.
Components of International Compensation
• An effective international compensation plan includes:
A. Base Salary
• Home-country or host-country-based salaries.
• Adjusted for currency fluctuations and inflation.
B. Incentives & Bonuses
• Foreign service premiums: Extra pay for international assignments.
• Hardship allowances: Compensation for working in challenging
locations.
• Performance-based incentives: Sales commissions, profit-sharing,
stock options.
C. Benefits & Allowances (Varies by Country)
• Housing Allowance: Rent and accommodation support.
• Relocation Allowance: Moving expenses for international transfers.
• Education Assistance: Schooling costs for expatriates’ children.
• Transportation & Travel Costs: Flights, company cars, fuel
allowances. 13
• Tax Equalization: Ensuring employees do not face higher taxes due to
Challenges in International Compensation
• Multinational companies face several difficulties
in designing global compensation policies:
Currency Fluctuations: Exchange rate
instability affects salary costs.
Taxation & Compliance: Different tax
structures can lead to double taxation or legal
risks.
Cultural Expectations: Perceptions of fair pay,
benefits, and work-life balance vary globally.
Cost-of-Living Adjustments: High variation in
living expenses across countries.
Standardization vs. Localization: Balancing 14
global corporate policies with local labor laws.
Thank You…….
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