Compensation in a knowledge based economy

Compensation in a knowledge based
economy

After studying this chapter, you should be able to:
1. The importance of a rapidly growing global economy.
2. The relationship between labor costs and organizational
competitiveness and profitability.
3. The contribution of organizational compensation to the
lifestyle opportunities of employees and their families.
4. Income levels that determine social-class structure for
inhabitants of the unites states.
5. The relationship among levels of education, knowledge
and skills and work-related income.

Compensation Strategy
 Develop a compensation program that
recognizes the lifestyle and standard of
living of all employees.

Compensation History
 Ever since the end of world war II, social, political and economic
systems have moved toward a world economy.
 In the past 25 years, however, this move toward and more
complex and competitive world has accelerated at a rapid pace.
 Although global economy focuses on such macroeconomic factors
as inflation, gross domestic product, monetary policies, trade
tariffs, and international resource allocation, one microeconomic
factor has been and will continue to be of critical importance
with in global economy. That factor is labor costs.

Continued
 Labor costs issues affect the efficiency and even the survival of public and
private sectors organizations.
 One major method of providing for the poor promoted some kind of
welfare payments in the form of money, food, housing, health care
services, and even clothing.

Continued
 A key factor in promoting effective delivery of essential
goods and services is the provision of a performance
based remuneration systems for all workers.
 Compensation management provides a step by step
approach for designing a remuneration system that
recognizes job requirements; employee related
knowledge and skills; and performance related incentives
that link individuals, team, work unit, and organization
performance. Total remuneration also includes a host of
benefits that protect and expend the life style and health
of workers and their families.

What is Compensation
Simply,
Compensation is the total package (financial or non-financial)
payment which is provided by the employer to the employee for
their employment.
Broadly,
Compensation is the monetary benefit which is given to an employee or
worker giving their services to an organization. Compensation includes
components like salary, wages, bonuses etc. The compensation provided
helps in motivating the employees, build their career and ensure that there
are committed in achieving the company goals.
Another Way,
Compensation is something, most usually money, which is given to the
employees of an organization or company as payment or reparation for
their service towards the organization or because of their loss incurred due

Importance of compensation
 Compensation is important for an organization to
consider its mission and vision and its strategies and
then devise the compensation system such that all these
components are inter-linked and aligned with each
other.
 Compensation comes under the parlance of human
resource (HR) department of an organization.
 It is the tool that organizations use to manage and
reward their employees, so that they perform efficiently.
 The compensation system that company follows should
be an attracting one, and it should motivate its
employees to work and justify the amenities provided to
them by the company.

Importance of compensation
Continued
 The compensation system should also ensure
that the turnover rate remains low and the
employees remain motivated.
 Along with other non-monetary perks &
incentives, the company offers compensation
and benefits to its employees. Companies
have to devise a compensation plan based on
the position, responsibility and qualification
of an employee.

Components of compensation
Compensation can be divided into the following components:
1. Completely fixed (per month or year)
2. Some fixed component, along with a variable component
(which is decided based on the rating of the employee and his
meeting of the targets)
3. Total variable component, where the total salary depends on
the rating received during evaluation

Components of compensation (cont’d)
 The compensation system followed by a company should
be regularly evaluated and updated as per its evolving
strategies and also based on the moves of its competitors.
Mostly compensation is paid at regular intervals like a
monthly payment. However, in certain cases the payment
of wages and salaries is delayed, which is known as
deferred compensation.
 Sometimes instead of giving money, companies do
payments on behalf of employees, which is also referred
as indirect compensation.

Capitalism and knowledge in a
global economy
 With the fall of the soviet empire and a
worldwide decline in communism, however,
interest in capitalism has risen to an all time
high.
 To gain appreciation of the influence of
these worldwide events on the role of
compensation professionals and managers, it
is helpful to start with a brief expiation of
capitalism and the dynamics that support it
as a viable economic solution to global

(cont’d)
 In the capitalistic world, employees must respect money
and the challenges of their work to gain satisfaction from
work performed.
 A major problem facing the United States and its
leadership role in a capitalistic democratic world is an
increasing and unacceptable difference between the
income of the lower-paid and the higher-paid members of
the workforce.
 The pay and compensation for those with acceptable
levels of knowledge and skills will rise, whereas those with
minimal levels of required knowledge and skill will see
their income opportunities stagnate, or even decline.

(Cont’d)
 More Than ever before, the compensation professional must be to
support all activities that will make the organization more successful.
 From the beginning of these organizational redesign efforts,
compensation professionals have been called upon to identify;
1) Job in which worker efforts can be combined,
2) Unneeded jobs,
3) Possibly jobs in which incompetent, obstacle, or unneeded employees
are being hidden, and
4) Jobs that can be outsourced.
 To assists their organizations in competing while functioning within
these
 often conflicting requirements, compensation professionals have had
to increase their knowledge and skills dramatically

Capitalism and Organizational Strategy
 To develop competitive advantage in a global economy, the compensation
program of the organization must support totally the strategic plans and
actions of the organization.
 For the human resource/compensation specialist, the assignment to
ensure accomplishment of organization strategy begins with determining;
1) The work that must be performed by some work unit or individual,
2) The kinds and levels of knowledge and skill required,
3) The quality of people needed to promote organizational success. And
4) The rewards the organization can offer to it members that promote a
work culture that ensures accomplishment of organizational strategy

Integrating knowledge and skill requirements,
organization compensation, and employee income
 The ability of individual to interact with eve-changing technologies places
boundaries on work assignments.
 The issues of work boundaries and work required knowledge and skills are a
major part of the discussion in this book regarding the setting of base pay
and the design of compensation systems.
 The major point presented in this chapter of compensation management is
that work does pay off.
 Although organizations are searching constantly for ways to keep labor costs
within acceptable limits, they must recognize that employee satisfaction
relates directly to income obtained from work performed and the lifestyle
opportunities made available to the workers and their families from this
work-earned income.
 To gain an appreciation of the relationship between work- provided pay and
employee work satisfaction, it is helpful to gain an understanding of social
class, class lifestyle, and income in the United States.

Pay and Social Class
 Almost from its start, the United States has flourished within a
democratic, middle-class environment.
 Today, with the continued prosperity, let alone survival, of the
nation in peril, it is important to recognize the relationship
among pay, earning and income, and social structure within in
the country.
1) Social Structure and income
2) Establishing class Family Income Limits.
3) Lifestyle and social class in the United States.
 The poverty class.
 The Working poor.
 Lower Middle class.

Continued
 Middle-middle class.
 Upper-Middle Class.
 The Wealthy.
 The Ultra rich.
4. Tw-Wage-Earner-Family.
5.Workforce Demographics.

Compensation in a knowledge based economy

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