In today’s scenario, the biggest challenge for HR managers is how to attract, retain and motivate the employees. Compensation plays an important role in this process. Compensation is a much wider concept than salary and perks. It is not always in monetary terms, but it also includes benefits (non-monetary). Compensation management is a process to reward employees monetary and non-monetary for their work, performance and contributions towards the growth of the organization.
As a process, compensation management has the following steps:
Compensation
Compensation ratio?
Use the compensation ratio
Factors that affect compensation ratio
Benchmarking
Budgeting
Compensation
Compensation is a remuneration awarded to an employee in exchange for their services to the organization. This can be in direct and indirect or in cash or non-cash forms. This is typically the biggest expense for an organization towards its employees. The formula for compensation is-Total compensation = Fixed Pay + Variable Pay + Benefits
Fixed Pay and variable pay can be terms as direct or cash compensation whereas insurance and LTC can be indirect or non-cash compensation.
Average compensation
This is simply the per-employee cost and can be derived by dividing total compensation by the total number of employees.Average compensation = (Fixed + Variable pay+ Benefits) / Total number of employees
Compensation Ratio
Compensation ratio mostly termed as compa ratio. This is the most common metric used in defining the salary range in the organization. It simply compares the salary of an individual employee from the median of the market salary given for the specific job.
Broadly it is categorized in the three buckets
<1 – Where salary is less than the median
=1 – Where salary is equal to the median
>1 – Where salary is more than the median
It can be calculated as Compensation ratio = (Actual Salary / Median of market salary) *100
Let us take an example
Ravi is working as a Manager in the Marketing department in an MNC. He is getting the salary of Rs 95,500/-. As per the market survey for his position, the lowest salary is Rs 80,500/-, highest salary is Rs 1,20,300/- and the median is Rs 1,00,400/-. Find out the Compensation ratio.
Compensation ratio = (95,500 / 1,00,400) *100 = 95.11%
So, this means Ravi is getting slightly less than the market rate.
Use of Compensation ratio
Effectively using Compensation ratio is important as it defines the compensation structure of the organization. Compensation ratios are used for the following purposes.
Setting base pay levels for every role
Salary negotiations
Discussion in performance reviews and annual increments
Salary guidelines around seniority, experience, job roles etc
Factors affecting Compensation ratio
Computation of the Compensation ratio is a bit technical and complicated so you should always keep the complications in mind. The complexities can be
Job titles
Responsibilities vs Job titles
Tenure
Experience
Geographical variation
Employer Branding
Individual quality
Compensation Mix
Benchmarking of compensation
While setting the compensation range, benchmarking is an important aspect on which you must work. You should compare the employee’s salaries with appropriate benchmarks from the market data. Job roles and responsibilities play an important role in this exercise as it may vary from company to company.
Suppose you are benchmarking the salary of Chief Marketing Officer so you need to analyze the data of same job responsibilities, qualification, experience etc to make it accurate and effective.
Compensation Budgeting
Compensation budgeting should not be overrated and oversimplified, it should be moderate and should consider all the aspects as it is a financial impact on an organization as well as employees. The shortsighted approach can lead to a budget shortfall and employee dissatisfaction. Successful compensation budgeting requires a comprehensive approach in the favor of employees as well as the company. Budgeting should not have to be over complex rather it should be realistic and comprehensive. You should consider the following factors while developing the compensation budget.
Merit Pay
Equity Pay
Promotional/ Career development compensation
Bonuses
Other Pay
In short, thoughtful and comprehensive budgeting can eliminate the hassle of recruitment managers, give insightful data to CXO’s to manage the business and to keep employees motivated and committed towards the success of the organization.
Author / Educator – Praveen Ratna
Praveen Ratna, a SHRM and HRCI certified HR professional, comes with 19 years of experience in Operations and HR domain of BFSI industry. He was working with Bajaj Capital Limited as a Senior Manager in the HR department. He has vast experience in Reward & Recognition, MIS & Dashboard, Performance Management, Performance Analysis, Automation of HR projects and HR analytics. He has led multiple projects of HR and got it automated in order to smooth functioning and improve the productivity of employees.