Compensation and reward policies for younger managers

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Human resources are the most vital resource of any organization. It plays the most important role in taking any decision, and in the success of the organization. So, it becomes the responsibility of the top leaders to manage these resources, motivate the employees and satisfy them with the well estimated remuneration and compensation. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. It is also one of the important factor in determining organisation's effectiveness. Different types of compensation include Base Pay, Commissions, Overtime Pay, Bonuses, Profit Sharing, Merit Pay, Stock Options, Travel/Meal/Housing Allowance, and Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes

Compensation is what employees receive in exchange for their contribution to the organization. Generally, employees offer their services for three types of awards.

Pay, refers to the base wages and salaries employee normally receive for the amount of task assigned to him for a particular period of time.

Compensation forms such as bonuses, commissions and profit sharing plans are incentives designed to encourage employees to produce rewards beyond normal expectation.

Benefits, such as insurance, medical, recreational, retirement, etc represent a more indirect type of compensation

Objectives of compensation planning:

Fairness or equity

Social Status of the employee

To reward employees on the basis of their achievements, skills and competencies

Source of motivation for high performing employees

Alignment of employee's future goals and performance with organization goals

Communicate the employees their worth to the organization

To define the organization's strategic planning

Compensation Policy Issues:

Pay for Performance

Pay for experience

Promotions and salary hikes

Overtime and shift pay

Probations period

Paid leaves such as casual leave, sick leave and unpaid leaves

Paid vacations

Pay on the basis of geographical differences

Classification of rewards:



( Extrinsic Rewards)

Non- Financial

(Intrinsic Rewards)


Praise and rewards


Satisfaction derived from job

Components of Compensation system:

Job Analysis: The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation.

Salary Surveys: It basically states the collection of salary and market data. The market data may include average salaries of the employers, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. It may work as a one of the deciding factor in determining the salary structure.

Pay structures: It is useful for standardizing compensation practices. Most pay structures include grade system where salary or salary range is defined for a particular grade. Step increments are common with union positions where the pay for each job is pre-determined through collective bargaining.

Compensation can be classified as follows:

Direct Compensation:

Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time. 

Indirect Compensation:

Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes

Compensation and Reward policies play an important role in a business organization. Since, among four Ms, i.e. Men, Material, Machine and Money, Men has been most important factor, it is impossible to imagine a business process without Men. Every factor contributes to the process of production/business. It expects return from the business process such as rent is the return expected by the landlord, capitalist expects interest and organizer i.e. entrepreneur expects profits. Similarly the labour expects wages from the process.

Basic Characteristics of Fair Compensation System:

Positive effect on the efficiency and the results produced by the employees

Enhancement of job evaluation process

System should be simple so that every employee can calculate the compensation amount provided to him.

Aid management in complying with various labor acts.

Able to solve the disputes between employees and union.

Able to bring peace in relationship of employee and employer.

Create an environment of competition among the employees

Minimises labour turnover

Targeting for employee retainment , so that they are not interested in switching to other companies

Success of the organisation is measured by the pay package it provides to the employers.

Organisations: Value of Young managers

The difference in the two generations seems to be the way in which today's youthful managers expect to find those challenging jobs and gain that growth. The restructuring of the past 20 years has left today's young professionals with no expectation of corporate longevity. They don't accept the old scenario of "pay your dues and you'll get that executive suite." Instead, they want to gain responsibility and knowledge on their own schedule--preferably sooner than later.

Young managers are the assets of the organisation. These are considered to be full of energy, enthusiasm, innovative ideas,  ambition, impatience, flexibility, independence and technology oriented. So, in the same way , organisations also expect a lot from young managers. Even, young managers have high expectations from the firm. They wish for early promotions, salary hike etc. Organisations have one set goal- to get the work done by the employees in the fixed time. Sometimes, the time limit provided to the employees is quite less to complete the work. At that time, organizations provide an option of overtime work may be on weekends or after the office hours. Here raises the question of employee satisfaction and the priorities

Issues with Compensation systems:

Most of the Organizations use performance-based compensation-it alleviates the problems of employee "shirking", the compensation based on the performance and ensures highly skilled employees' desire to work for the company. However, firms prefer to use performance-based pay far less frequently than agency theory predicts. There are some psychological factors associated with this theory. Some of them are as follows:

Main Three psychological factors most prominently influence compensation strategy - social comparison processes, overconfidence, and loss aversion on the part of employees. Social comparison processes imply that employees are always interested in knowing the pay of their nearby teammates and other employees. If employees are overconfident about their abilities, they may not be able to use the skills in a proper manner, which is often the case, they may become unmotivated or even engage in sabotage if they perceive unfair pay gaps between their and others' pay.

Loss-averse employees are more motivated by potential failure to meet sometimes arbitrary levels of desired pay than they are by potential gains. This phenomenon implies that employees may work less hard than firms' desire even if paid for performance.

Rewards in the organisation

The aims of reward and pay are to attract, retain and motivate employees traditionally, salaries were thought to be what attracted individuals to an organisation, benefits helped to keep them there and bonus and incentive schemes motivated them in their work.

Latest research reveals that individuals are attracted, retained and engaged by any kind of financial and non-financial rewards and that these can change over time depending on their personal circumstances. It may be that individuals in certain situations do not consider the financial elements of a package particularly important. For instance, people at the beginning of their career may be more interested in learning, gaining access to training and career development. Similarly, employees may be willing to work for lower pay rates (or even volunteer their services for free) if they have a strong attachment to the mission of an organisation such as a political party or a charity. 

Employers need to find out what attracts, retains and engages individuals and explore how best they can meet these needs - as well as meeting the requirements of the business within the appropriate legal and regulatory environment. When creating an employer offering, it is also crucial that organisations integrate the various elements of the reward package so that they support, rather than contradict, one another. 

A number of organisational risks are involved when making decisions on how employers reward and recognise individual and collective contribution.

Following are the issues associated with risks:

1 Reward unable to attract key skills

2 Poor line management reward management capability

3 Reward not engaging employees

4 Inability to change reward

5 Employees not understanding/appreciating reward

6 Reward not retaining talent

7 Increasing pension provision costs

8 Not enough cash to meet reward commitments

9 Reward is not perceived as fair

10 Inability to communicate reward effectively

Characteristics of reward policies:

An analysis of various total reward models by Thompson finds that they can be characterised by an approach that is:


Best fit








Rewards and employee satisfaction

It is not very easy to provide rewards to the employees and make them work. It is a function of several factors that organizations must learn to manage:

1. The individual's satisfaction with rewards is, in part, related to expected result and the actual result. Feelings of satisfaction or dissatisfaction only arise when they start comparing their input - job skills, effort, and performance - to output - the mix of extrinsic and intrinsic rewards they receive.

2. Employees have the tendency to compare themselves with the other fellow human beings.. Employees compare the input/output ratio with that of others. People vary considerably in how they weigh various inputs in that comparison. They tend to weigh their strong points more heavily, such as certain skills or a recent incident of effective performance.

3. Employees have the tendency to overrate the pay scale of fellow team mates in comparison to their owns. Misperceptions of the performance & rewards of others also rise because organizations do not generally make available information about the salary or performance of others.

4. Finally, overall satisfaction results from a mix of rewards rather than from any single reward. Internal and external rewards both are important, as they both cannot be substituted for each other. For example, for a boring and repetitious kind of work, if the employee is provided with the intrinsic reward and the employee who is given extrinsic rewards continuously for the challenging and interesting work, both of them will get dissatisfied after some time.

Manufacturing and production

Private sector services

Voluntary sector

Public services

Enhance pay-performance connection

Enhance pay-performance connection

Encourage high productivity

Enhance pay-performance connection

Motivate employees

Motivate employees

Reward high-performers

Reward performance through a non-consolidated pay award

Encourage high productivity

Reward high-performers

Enhance pay-performance connection

Reward high-performers

Reward high-performers

Encourage high productivity

Recruit and retain high-performers

Motivate employees

Improve financial results

Improve financial results

Reward performance through a non-consolidated pay award

Encourage high productivity

Support business goals

Recruit and retain high-performers

Motivate employees

Recruit and retain high-performers

Reward performance through a non-consolidated pay award

Support business goals

Improve financial results

Support business goals

Table 1.1.Key objectives behind compensation and reward schemes( sector wise)

Younger Managers: Compensation and rewards:

Now a day, even we consider any of the sectors like IT, manufacturing, private sector and public sector services etc. The majority of the managers recruited by these firms are in the age group of 25-35 years. Young managers are highly inclined towards the salary structure and the extra benefits provided by the company, than the kind of work they are assigned to do. So, there are various practices, dilemmas and trends associated with the compensation and reward policies. Some of them are as follows:


More Work, more compensation

Night shifts, more compensation

At some jobs, unmarried people are preferred

Insurance schemes for the managers and the nearby blood relations

In some companies, female managers are not required to work late hours.

Managers are motivated to work for higher compensation


Young managers' job expectations often exceed reality. Since their academic training may have focused on cases in which they took the roles of top-level executives, they may now expect to get a lot of responsibility quickly. Also, it is a normal perception among the managers that they should receive higher compensation in comparison to others.

Organizations are political. Often young managers are either insensitive to the political aspects of organizations or may resent them. Further, they may not be aware of the real criteria by which performance is rated. In some cases hard criteria such as performance are difficult to assess, and superiors may focus instead on whether the young manager fits their prejudices. So, at this point of time, young managers expect to get higher compensation but they do not get in reality.

Some managers feel that working for late hours in the office, show the sign of loyalty and ask for high compensation treating their work as overtime.

Young managers may experience anxiety. They often find that, just at the time they are beginning to reap the rewards of their jobs, they question the value of what they are doing. 

Most young managers face unexpected career dilemmas that force them to think about what is ethical and unethical.


Young managers are known for innovation and expectations from them are quite higher.

Most of the managers of the age group 25-35 are more energetic and excited towards the work and so they have high demand of rewards as well for the work done.

Compensation systems: the general practice

A body of experienced theorists has been developed about how money satisfies and motivates employees. Virtually every study on the importance of money compared with other potential rewards has shown that money is important. The importance of pay and other rewards, however, is affected by many factors. Money, for example, is likely to be viewed differently at various points in one's career, because the need for money versus other rewards (status, growth, security, and so forth) changes at each stage.

Companies have developed various compensation systems and practices to achieve pay satisfaction and motivation. In manufacturing firms, payroll costs can run as high as 40% of sales revenues, whereas in service organizations payroll costs can top 70%. General Managers, therefore, take an understandable interest in payroll costs and how this money is spent.

The traditional view of managers and compensation specialists is that if the right system can be developed, it will solve most problems. This is not a plausible assumption, because, there is no one right answer or objective solution to what or how someone should be paid. What people will accept, be motivated by, or perceive as fair is highly subjective. Pay is a matter of perceptions and values that often generate conflict.