What is Compensation ?
Compensation is an indispensable and most desirable part in every worker's life. It can be defined as the sum of money that an employer pays to an employee for providing his services to the organisation. Compensation determines the lifestyle of employee in the society, his dedication towards the organisation and his level of motivation.
Compensation in HRM :
Compensation is important for the employer also as it determines the production cost in the organisation. One of the major reasons for the incidents of strikes and lockouts in an organisation is compensation. Therefore, the responsibility of determining compensation is not a very easy task for the HR personnel. A typical compensation of an employee comprises of financial as well as non-financial aspects.
Definition of Compensation
According to Gary Dessler :
"Compensation means all forms of pay or rewards going to employees and arising from their employment".
According to Terry Leap :
"Compensation is a broad term pertaining to financial rewards received by persons through their employment relationship with an organisation".
According to Cascio :
"Compensation includes direct cash payments, indirect payments in the form of employee benefits, and incentives to motivate employee to strive for higher levels of productivity".
According to R. Wayne Mondy :
"Compensation is the total of all rewards provided to employees in return for their services. The overall purposes of providing compensation are to attract, retain and motivate employees".
Objectives of Compensation
Objectives / Principles of compensation are as follows :
1) Establish Equity :
One of the important reasons for making compensation plans is to establish equity. It refers to increasing the wages of the employees who are paid low and eliminating inequalities in the organisation. For this, concept of equal work for equal pay should be followed.
2) Increase Worker's Efficiency :
One of the most important reasons for compensation is to increase the efficiency of the employees. It plays vital role in the motivation of the employees
3) Macroeconomic Stabilization :
Compensation is aimed at achieving macroeconomic stability. This can be attained by high employment rate and low inflation rate.
4) Effective Distribution of Labour :
Compensation is designed to distribute labour effectively in labour market which means that employees can move wherever they find a profitable job. Such a movement can be :
- From one place to other either in terms of location or within or outside the organisation. Movement can be at the same location but from one organisation to other. Major cause of such a movement is the money. For example, workers may move from a place where too much manpower is available and wages are lower to a place where high wages are available to the workers.
- When an employer offers below average wages to the employee, employee turnover rates are high. On the other hand, if the employer offers good wages then more applicants are applying for the job.
- When employee switches from an organisation which is collapsing to rising one efficient allocation of labour takes place on its own.
5) Maintain Income-Expenditure Ratio :
If there is a proper compensation plan, then the employees will get the amount of wages they deserve. They will neither be under-paid nor over-paid. In that case, employees will not switch the job and organisation will remain in a healthy financial condition.
6) Avoid Conflicts :
If the compensation system is well planned, the workers will be satisfied and the workers' union will have nothing to be unhappy and this will create harmony and peace in the organisation.
7) Legal Compliance :
An effective compensation always complies with the laws. In this way, employer is also saved from the legal problems.
Characteristics of Compensation Plans
Features / Characteristics of the best compensation plans are as follows :
1) Availability :
First and foremost requirement for high performance is the availability of the compensation. Low compensation does not motivate employees to do work. Employees mostly wish for maximum bike but their wish is never fulfilled in reality. False reporting, theft, etc. are the negative results of low hike.
2) Timeliness :
Compensation must be provided to the employees on time because untimely or long duration taken for payment of compensation may produce detrimental results.
3) Performance Related :
Compensation should be based on the performance of the employee. It motivates the employee and sends the right message to other members of the organisation.
4) Durability :
Some types of compensations are more valuable and have a long lasting effect than the others. For example, non-monetary compensation such as autonomy, challenging tasks, accountability gives long lasting effects as compared to monetary compensation.
5) Equity :
Often comparisons are made between the compensation a person is getting with the one his colleague is getting. If the compensation is given in an unfair way, it will produce negative results in the long-term Hence, compensation should be equal for employees with similar job profile. However, it should be in equity with the performance, job position, responsibilities of the employee as well.
6) Visibility :
Management must ensure that the system of compensation is visible in an organisation. To make such a perception, it is important that the persons are given important assignments and delegated important tasks such as to lead a committee. This will create a competitive and positive environment in an organisation.
7) Flexibility :
Compensation should be given to employees at regular intervals. It should be designed in such a way that it covers both qualitative and quantitative aspects of satisfying the employees.
8) Cost Effective :
While planning compensation, it should be kept in mind that compensation requires funds of the organisation. Therefore, compensation should be distributed in a cost effective way.
Factors Influencing Compensation
Major factors which affect compensation are explained as follows :
1) Ratio of Demand and Supply :
Demand and supply relationship are of different kinds and work at various levels. Levels can be regional, national or international level. Salary is less, if the workers are in surplus as there are more options for the employer. Similarly, if the employees are less and demand for workers is more, their wages are expected to be more. Thus, it can be said that demand and supply is a major determinant of compensation.
2) Ability to Bargain :
Bargaining capacity of worker is another factor which influences the wage determination. If the trade unions are strong, then the wages paid to workers are high because trade unions pressurize the employers to meet demand of workers and give them higher wages.
3) Cost of Living :
Cost of living is different in different places, regions and countries. In an underdeveloped nation, the cost of living is poor hence wages are low, as they are expected to live with less facilities while on the other hand, a developed nation has higher wages.
4) Type at Market :
Wages of the workers depend on the type of the market where they are working in. If the market is competitive, the wages of the employees will be uniform in the market and will be good. But if the competition is low and poor, the wages will not be at par.
5) Comparative Wages :
Wages also depend on the wages being paid by the other organisations. Pay rates must be compatible with the salaries paid by the other organisations, which belong to same kind of industry. If the wages are comparative, then employees will be satisfied.
6) Ability to Pay :
Paying capacity of an organisation is a major factor which affects the employee compensation. Large organisations with high profitability can offer a good salary to its employees while small organisations with low profit cannot afford to pay high salary to its employees.
7) Labour Efficiency :
It is also an important factor in determining compensation. If the person is qualified and more competent for the organisation, then obviously he has more value and earns more which is not the case with every employee in the organisation. That is why some employees have more salary package than others.
8) Employment Skills :
If a person is placed on a high position which requires high skills and greater responsibilities, then he is expected to get higher wages. On the other hand, a person with lower skills at low position, who has to carry-out fewer responsibilities, will be paid low wages.
9) Government Regulations :
Sometimes, mere bargaining is not enough for an employee to get what he deserves So, the government has put some regulations which have to be followed during wage determination, so that workers can get minimum wages to maintain a good living for themselves and their family members.
10) Image of the Organisation :
Some organisations believe in quality of labour. They pay higher wages to get qualified professionals.
Importance of Compensation
Advantages / Roles of compensation are as follows :
1) Helps in Attracting High Skilled People :
Compensation packages which are offered by the organisations are one of the primary factors that an employee seeks in a job. So, high quality professionals will seek higher packages. Components of compensation package can be different from person-to-person. High salary will attract young and bachelor employees, whereas flexible working hours is a lucrative option for a family person So, organisations should match the profile of the candidate and his needs in order to give him the most lucrative offer.
2) Improves Efficiency of Organisation :
Effectiveness of an organisation can be achieved by high skilled persons. To increase efficiency of an organisation, high quality professionals are needed. High quality workers an attracted by lucrative compensation packages, so compensation is an effective way of acquiring good talent.
3) Acts as a Link between Employer and Employee :
Compensation is a link between employee and employer as it affects both and brings them together. Thus, compensation management is good for the organisation and employees as well.
4) Helps in Retaining Employees :
An organisation is dependent on its manpower. If talented workers continually switch the job, then the organisation cannot perform well as the cost of training the new employee again and again will be high and loss of talented workforce will always be a problem for the organisation.
Therefore, to retain talented employees, many organisations offer benefit plans such as retirement plans. health insurance plans, etc. The organisations offering these options to the employees are able to retain their employees in s better way than the organisations which do not offer these plans. Another way to retain employees is to give them regular promotions. It gives them a constant increase in the salary and provides motivation to work for the achievement of the organisational goals.
5) Motivates Employees for Better Performance :
Compensation is the prime factor for motivating the employees. It not only motivates the employees but also increases their intensity of motivation. A highly motivated employee is an asset for the organisation who increases the efficiency, the overall production and returns of the organisation.
6) Encourages Healthy Competition and Collaboration :
Compensation increases the healthy competition in the organisation, which is not counterproductive. It causes the employee to have an urge to perform better than the others and get the reward for work. Due to this, employees try to be innovative in their work which in turn proves to be beneficial for the organisation.
7) Helps to Differentiate between Good and Poor Performers :
Usually in an organisation, employees can be differentiated into few high performing employees, majority of average performing employees and few low performing employees. Average performing employees can be motivated by rewarding the highly performing employees and depriving of rewards for low performing employees. It not only differentiates the efficient and inefficient employees but also gives them motivation to work better.
8) Stimulates Employee Involvement :
It is a well-established fact that an organisation can perform well, only if, the employees are dedicated to do quality work. For dedication, there has to be some motivating factor which involves the employees. Compensation is one of the powerful tools which ensure such dedication.
9) Strengthens Organisational Competitiveness :
Competitiveness in the market is dependent on the quality of the employees in an organisation. These people help to deal with crisis during tough times in the organization, so they have to be satisfied, which can only be done by compensation to a large extent.
10) Maintains Organisational Harmony :
If the compensation is fair and the employees are well paid, then atmosphere at the workplace is harmonized.
Disadvantages of Compensation
Following are the major disadvantages / limitations associated with the employee compensation :
1) Pay Secrecy :
Compensation packages are formulated and applied differently in different organisations. But almost all the companies follow the rule of confidentiality when it comes to the salary distribution. Confidentiality of the payments increases the complexity in managing the system as leas information regarding salaries is to be provided to the employees.
2) Involvement of Employees :
People are often more involved in tasks in which they perform well. Not all employees should be involved in the process of designing compensation system of the company, as this may not revert positively. It can be done only if the organisation has been following the principle of participative management for a very long time and if there is a well-balanced and trustworthy environment in the organisation.
3) Pay Reviews :
There should be constant changes or reviews in the payments. It should not be fixed. Hence, the company performs pay reviews in three forms, viz fixed date, anniversary dates and flexible reviews. In a fixed date pay review, payments of all the employees are reviewed on a particular date of the year. In an anniversary pay review, payments of the employees are reviewed after 12 months of their respective joining Further, variable or flexible pay reviews can be done on variable timing depending upon the felt need. Variable reviews reflect flexibility. In this form of pay review, high performing individuals who are in lower salary grade are rewarded more often. Generally, in established industries, pay review is done once in three years while in government companies, pay reviews takes place between 10 to 15 years depending upon the recommendation made by the Pay Commissions.
4) Wage Compression :
Wage compression is the biggest problem in today's compensation system. It means that the new joining employees have higher salaries than the employees who are working for long in a firm. Due to this, the pay differentials between the old and new employees become very small or negligible. Wage compression can be considered for a short-term basis but on long-term basis it affects the morale and efficiency of the employee badly.
5) Inflation Effect :
Inflation has a great impact on compensation system adopted by many organisations, as it has been variable over the years. In early 1980s, it was high and employees received about 12 to 13 percentage of hike in their salaries. Later, when checked in 1990s, hikes went down resulting in the salaries to decrease up to 7 per cent. In the late twentieth century, only 4 percent hike was given. Hence, it is difficult to satisfy employees about the decreasing and increasing levels of hikes in the salaries.
6) All-Salaried Workforce :
With the increase in the participation of the employees in all organisational processes, all- salaried workforce has been adopted by many of the organisations. All workers including ground staff are provided with salaries and wages without being primarily dependent upon the number of working hours. It means employees' absenteeism or lateness does not affect their salaries. This policy is chiefly introduced to remove the feeling of hourly paid employees about being second class citizens.
7) Reduction in Wages :
It is observed that many companies adopt the strategy of reduction in wages. Various manufacturing companies such as automobile, steel, etc. are extracting cheap labour from different countries. It does not only affect the wages of the employees but also creates a sense of insecurity in their minds. However, companies have adopted two-tier wage contract which acts as a short-term solution to this problem under which newly hired employees are paid very less, and the current employees receive the existing wages. This is only a short-term solution because it creates internal inequity as new hired workers at cheaper wages feel that they are not equally treated like the existing workers. This problem has a negative long-term impact as the new workers consistently increase in numbers.
8) Comparable Worth :
Under this system, equal salary should be given to the employees, if their contributions are similar to the organisation, irrespective of their designation and post. The individual wages will be decided by a point ranking method of job evaluation. Apart from the concept of equal pay for equal work, concept of comparable worth exists, which states that if two individuals receive same points in the point ranking method, then same wages will be paid to them. This evaluation is generally biased, as more points are given to jobs which are conventionally held women while evaluating the individuals' jobs.
Concepts and Components of Pay Structure in India
Concepts and components of pay structure in India are as follows :
1) Basic Salary :
Basic salary is the fundamental component of pay structure. It is the major portion of the employee's compensation. Different components of the wages such as bonuses, premiums, allowances, etc. are determined with the help of basic salary. Seniority and rank are the two factors, which are considered for determining the basic salary. Basic salary is a major issue of discussion during negotiations between management and labour unions. Labour unions demand for increasing basic salary as it affects other benefits of the employees also.
2) Incentives :
An incentive is a very important component of pay structure. It is given in addition to the regular wages. Incentives attract the employees and motivate them to perform better. It also motivates the employees to improve their efficiency and productivity of the organisation.
3) Bonus :
Bonus is the payment which is given to workers.as a share of the organisation's profits in a particular year. The profit is expected to be made due to contribution of employer and hard work of the workers. Bonus is paid according to the performance of employees based on certain criteria, which may include their eligibility, performance standards, time span, etc.
Earlier, payment of bonus was just confined for the manual workers, but now they are applicable in almost all types of organisations. Profit-related bonus, attendance bonus, work study related bonus are some examples of bonuses.
4) Employee Benefits :
Employee benefits are also known as fringe benefits or fringes. They are given to the employees in addition to their wages and salaries, e.g., health care benefits, retirement benefits, etc.
5) Provident Fund :
Provident fund is the payment which an employee receives after his retirement or when he resigns from the organisation. Both employee and employer contribute equally in the provident fund. The provident fund is mainly given with the objective to secure the future of employees after retirement.
6) Overtime Pay :
It is the amount of compensation that an employee receives if he works for extra hours beyond his normal working hours.
For example, if the working hours for an employee are 42 hours in a week but if he is working for 48 hours in a week then he has to be paid extra amount for the extra 6 hours he has worked. In case, the employee is working for more than 48 hours in a week, he should be paid at double rate.
7) Allowances :
Allowances can be defined as the payment given to an employee by an employer in monetary terms. It may be fixed, predetermined or it may be provided regularly in lieu of services given by the employee. Taxable, partially taxable, and fully taxable are the three types of allowances given to the employees. Some important allowances are given below:
i) Dearness Allowance (DA) :
Dearness allowance is that allowance which is given by an employer to his employees to compensate them for the increased level of price in the economy. It is a fully taxable allowance.
ii) House Rent Allowance (HRA) :
HRA is given to employees by his employer for his accommodation expenses.
iii) Conveyance Allowance :
It is an allowance which is given to employees to compensate the expenses incurred on the conveyance to perform their duties.
iv) Leave Travel Allowance (LTA) :
This allowance is given to employees for spending holidays with their families. The amount of allowance depends on the designation of the employees.
v) Fixed Medical Allowance :
This allowance is paid to employees at fixed time period at a fixed rate regardless of the actual amount of expenditure done on the medical treatment.
vi) City Compensatory Allowance :
This allowance is given to the employees who live in big cities. The aim of this allowance is to compensate the high cost of living in big cities.
vii) Tiffin Allowance :
It is paid to the employees by the employer in lieu of tiffin expenses.
viii) Telephone/Mobile Allowance :
This allowance is given to employees by the employer in order to help employees in maintaining a telephone or cell phone.
ix) Children Education Allowance :
This allowance is given to employees by the employer so that employees can meet the expenses of their children's education.
x) Hostel Allowance :
This allowance is given to the employees by the employer to meet the expenses that have incurred when their children are staying in hostel while studying away from their hometown.
Traditional Approach to Compensation
The traditional approach to compensation programmes is to provide salary or basic wages and afterwards few additional benefits subject to what is suitable to the agreement. These benefits may be added at particular hierarchical levels. may be regarded as an outcome of accomplishments or may be negotiated independently.
The traditional systems of compensation which have been used since years centered on "paying for the job". which mostly emphasizes on the designation or the grade or the job, but not centered on the person by whom the job is being performed. The evaluation of the external and internal value of job is the basis for the salary given to each job. On the basis of market survey and outcome of job assessment, a pay structure is created to set restrictions on pay. A shift in the pay structure occurs on the basis of merit or the time expanded by an employee in a job category.
Traditional system of compensation comprises seniority, longevity and merit. The length of service by a worker in a temporary or permanent position or job is referred to as seniority. In few employment conditions. time in supplementary positions may also be added to the seniority of an employee. The decisions regarding pay are made on the basis of time duration of employees in a position and years of related experience in such organisations which use seniority as a basis of compensation system. A compensation based on sonority is the representative of an entitlement compensation philosophy. Contrary to this, a compensation system where employees by whom similar duties are performed are given compensation on performance basis is referred to as merit pay. Though the increment in salary in merit pay system is dependent on the past performance but this also aims at encouraging the receiver to carry on to that performance level in the coming time.
A feeling of fairness, orderliness, objectivity and rationality, to job ranking value process in a firm is communicated by the traditional approach. Plans of job evaluation particularly point-factor plans, recognize the specific factors which are valued in a firm.
Limitations of Traditional Compensation Approach
In the past few ten or twenty years, new kinds of pay programmes have emerged. A number of these programmes denote a substantial difference from the traditional approach. Thus, it is beneficial to see that what are the reasons due to which organisations are trying with new approaches :
1) Change is the fundamental nature of work. There are many factors because of which the manner in which the work is organised, done, and directed has been influenced. These factors include competitive pressures. the move from manufacturing to service economy, emphasis on quality, the uncertain business environment, and the globalization Team-based processes, coaching style of supervision, and worker empowerment are the crucial issues at the present time. Jobs are flexible and are more widely defined. Traditional job description activities are being substituted by more common employee roles.
For example, when IBM decreased the number of several jobs it used above 5,000 to less than 1,200, it was reacting to such similar pressures by "generalizing" and widening work. But traditional job evaluation was based on a different work philosophy. Excessive importance by several traditional programmes of job evaluation is given to special knowledge and the monetary value of areas managed. Some, if any, traditional plans of job valuation clearly takes into consideration working successfully across and in the groups, challenges relating to customer service, or responsibility towards quality as important job dimensions. Therefore, it is claimed by a few individuals that wrong things are rewarded by traditional plans of job evaluation.
2) It is the presumption of the traditional approach that the main aim of the compensation system is paying competitively. For this purpose, the compensation professionals in the organisations are likely to be "outwardly focused", observing the practices of the competitor, adopting such practices which seem to be productive, and making use of surveys for recognizing suitable pay levels. A stylish and popularized thinking may really be motivated by this component of compensation management. Contrary to this traditional approach, the efforts are being taken by the successful organisations for distinguishing themselves from other organisations in the market area. Opponents of the traditional approach suggest compensation professionals to "focus inwardly" which will encourage, supervise, and energize performance taking into account the goals and policy of a single organisation.
3) Several opportunities are offered by the process of traditional compensation for rater's errors, bias, other forms of disagreement and misrepresentation. It is proclaimed by many that the programmes of traditional compensation system have been unfair against the jobs which were traditionally held by females.
4) Traditional plans have been condemned for the measurement of the value of internal job and after that believing on the information of market survey for creating actual pay. The net outcome is that few jobs can be rated rather high regarding their job content using a plan of job evaluation, however are paid relatively less in case their contribution is underestimated by the market. It is argued by comparable worth followers that this often takes place as the market area biased.
5) It is also argued by criticizers that "entitlement mindsets" in respect of workers is created by traditional plans. A hope among-st employees regarding upward movement of pay is nurtured by adjustments in similar pay scale and increases in annual base salary. It may not be possible for firms in extremely competitive circumstances to absorb such constant rise in fixed costs.
Therefore, traditional system is unsuccessful in distinguishing among-st different persons whose levels of performance may differ. This system also fails in identifying good performers and encouraging them for maintaining their high level of performance standard. Motivation for maximum number of employees was not provided by this approach, i.e.. the employees by whom executives were observed as being rewarded for the overall accomplishments of the company. It is necessary that "person-focused pay" or "pay for the person" should form the basis of a good compensation system.
Current Trends in Compensation
In today's scenario of companies adopting compensation packages, new trends such as perks and benefits, which were considered impossible at some time, are added which make these packages more lucrative. Traditional patterns of meeting employees once in blue moon and giving them a regular fixed 4% hike, are also obsolete. With the change in the needs and wants of the employees, compensation packages adopted by various organisations must be continuously changed in order to stay competitive in the market. It is not essential that the changes in compensation plans change the way a company performs in the market. Regular overhauling of the compensation system has become extremely important due to fierce competition, ability of maintaining. retaining, and hiring quality professionals. From corporate practices, following trends of employee compensation management can be highlighted :
1) Gross Compensation :
Within an organisation, the gross compensation differs at every hierarchical level. There exists a considerable difference between the gross compensation of managers and their subordinates. This difference largely depends upon the project and support functions Companies plan high salary systems specifically for individuals at higher levels which is the reason for considerable difference in basic salaries.
Companies offer non-tax perks that are usually divided in several heads, which act as a type of reimbursement for high levels of management. An allowance is also given under soft furnishing allowance for purchasing curtains, carpets, utensils, and crockery which is annually paid as a non-taxable allowance. Most of the organisations have omitted components such as servant's wages and utilities allowance as they are taxable allowances. Conveyance is the field in which a lot of variations can be done. This field covers various practices such as provisions of cur, driver, reimbursement of expenses on car, parking, cleaning. petrol and maintenance, etc.
2) Employee Benefits :
Nowadays, the companies encourage their employees towards purchasing of their own conveyance via various hire-purchase plans under which, the installments will be paid by the company. The practice, in which the company provides conveyance to its employees, is diminishing. This solves the problem of accumulation of used cars by the organisations especially with high employee turnover. Providing loans for automobiles is a common practice which is followed by most of the companies these days. However, interest rates and repayment period may vary from one company another.
Many companies have a tie up with various hospitals and insurance companies for providing medical benefits to their employees. Free health check-up programmes are also organised by several companies, annually. Some organisations even bear the hospital expenses of the employees of special grades and ages. Very often, companies sponsor various education programmes for their employees in the form of evening classes or time-outs.
Companies even pay for books, periodicals, newspapers or journals and their subscriptions up to a limited extent. Club memberships are offered to senior management including onetime joining fees for one club and annual or monthly subscriptions for more than one club, which becomes an attractive perk. Bulk corporate memberships are also often provided to the employees. Furthermore, they are provided with soft loans for the purchase of furniture, appliances, and computers by many organisations. Housing loans and interest subsidies are also offered. The reimbursement plans include travel expenses covering accommodations in guest houses and abroad holiday packages for senior employees and their families. These reimbursements are awarded to some employees as a return for their exemplary performances.
3) Pre-Employment Benefits :
Pre-employment benefits are the new trend that is observed in many companies these days. It is an attempt to make the job lucrative and attractive for talents in the market. These benefits include coverage of all relocating expenses such as expenses for their families, transport of personal goods, support in locating house, schools, hospitals, etc. However, these components are taxable in nature.
4) Broad-Banding :
It represents the small hierarchal structures of organisations that give more importance to team work rather than individual contributions. The breaking down of salary grades into fewer wide "bands" for the management of career growth and administration of payments is known as Broad-banding. It supports the leaner and customer-focused structure of organisation by eliminating the hierarchies associated with traditional pay bands.
Broad-banding involves making groups of jobs on the basis of similarity in duties, responsibilities, and levels of account-abilities. These groups or bands are created on the basis of job analysis process of examining the work performances. Broadband increases the range of salary for enabling greater flexibility and efficiency in organisations. It supports individual career development and market competitiveness, and also helps in reducing the number of job classifications.
5) Team-Based Pay :
Nowadays, companies believe in rewarding teams rather than individuals. This has led. to the concept of team-based pay that encourages individuals to produce best results through working in teams rather than performing individually for compensations. This concept helps team members to work in group and cooperate with each other. Team-based rewards grab the attention of every individual in the team, thus stimulating cooperation between team members. This reward system is very effective for an organisation through which many employees perform similar tasks. These rewards are easier to evaluate, as they inculcate the importance of teams.
As some organisations are following the concept of team, it has been observed that it is difficult for the employer to develop team-based compensation programmes. One of the main problems faced by the employer is how to compensate an individual working in team, and his performance, which is judged by the team as a whole. However, base pays are calculated on the basis of individuals' competencies, experience, and other job factors. But, many companies prefer team-based pay rather than base pay.
6) Knowledge-Based Pay :
The companies have increased their focus towards innovative employee involvements and compensation strategies as they search for new methods of improving competitiveness. One of the newly emerged compensation strategy is Knowledge-Based Pay (KBP) or Skill-Based Pay. This strategy helps in improving the flexibility of the employees. KBP focuses on compensating individuals on the basis of the knowledge and skills they possess instead of rewarding on their performances.
7) Competency-Related Pay :
This compensation strategy can be a part of competency-based approach to HRM and thus, is attractive in theory. It is also compatible with human capital management and focuses on employees to use their competencies and skills in the workplace. By focusing on competency-related pay, the over-emphasis done on PRP (Performance-Related Pay) is ignored while achieving quantitative goals. This strategy compensates individuals for their competencies and capabilities rather than their results over the tasks on which they might have slight control.
In competence-based pay, employees get compensated according to their respective skills and increased knowledge instead of their job positions. It connects the pay progression with the evaluation of competence levels of employees. The basis of this evaluation is competence profile and framework of the employees. The expected competence levels are clearly defined to which the actual levels of the employees are compared for evaluating the compensations.