1 Compensation Introduction

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Compensation


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Compensation Concept

Compensation refers to a wide range of financialand non-financial rewards to employees for theirservices rendered to the organization.

It is paid in the form of wages, salaries, andemployee benefits such as paid vacations,insurance, maternity leave etc.

Basic compensation involves monetary benefits toemployees in the form ofwages and salaries.


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Compensation of employees for their services is animportant responsibility of HR Deptt.

Every organization must offer good wages and fringebenefits to attract and retain talented employees.

Compensation of the workers vary depending upon thenature of the job, skills required, risk involved, nature ofworking conditions, paying capacity of employer,

bargaining power of trade unions etc.

Compensation is viewed as a system of rewards tomotivate employees, so that organization achieve itsintended objectives.


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EMPLOYEES PERSPECTIVE

What compensation do you seek?

Direct

Money

Indirect

Benefits


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EMPLOYERS PERSPECTIVE

What do you compensate?

Job:

Responsibility

Critical function

Job content

Individual Characteristics:

Ability

Training

Education


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COMPENSATION MANAGEMENT

Compensation is what employees receive in exchange for their

contribution to the organisation.

Total compensation = Direct + Indirect Compensation

Base Pay Incentives Benefits


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It enables an organization to attract and retain

qualified, competent worker.

It motivates employee performance.

Its cost structure reflects the organizationability to pay

It is sum-total of different components

(financial and non-financial)

It complies with Government regulations.

Characteristics-Compensation System


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Objectives of Compensation System Acquisition and retention of qualified personnel

Legal compliance with all appropriate laws andregulations

Ensuring Growth in a Cost effective way for theorganization

Internal, external, and individual equity foremployees

Performance enhancement for the organization

Higher efficiency, morale & motivation

Reduction in turnover, grievance and frictions

Improving quality, performance

Rewarding desired behavior


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Compliance- to govt. regulations

Equity- Internal and external relativity. Fairness

Balance- Pay, benefit-provide a total package.

Cost Effectiveness -Pay should not be too excessive.

Security- Employee feel secure , satisfy basic needs.

Incentivizing/ motivation- Pay should motivate ratherthan control.

Acceptable to Employee-Feel reasonable.

Understandability

Administrative efficiency

Principles of Compensation System


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Organization ability to pay.

Supply and demand of labor.

Prevailing market rate.

Cost of living.

Living wage

Trade union bargaining power.

Job-requirements.

Managerial attitude.

Factors Influencing-Compensation System


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Compensation Dimensions

Pay for Work and Performance: base pay, premiums and

differentials short-term bonuses, merit pay and certainallowances

Pay for Time not worked: pay for holidays, longer paid

vacations, and paid time-off for a wide variety of personal

reasons Disability Income Continuation: social security, workers

compensation, sick leave, and short-term and long-term

disability plans

Deferred Income: social security, employer provided pensionplan, savings plans, annuities and supplemental income plan.

Tax benefits, Stock purchase options, and grant plans are

commonly used.

Contd..


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Compensation Dimensions

Family Income Continuation: life insuranceplans, pension plans, social security, workerscompensation

Health, Accident, and Liability Protections:

insurance plans, payment for medical relatedservices

Income Equivalent Payments: perquisite,

perks, tax benefits, use of company car,payment for expenses to professionalmeetings, subsidized food services, and childcare services.


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SCOPE/COMPONENTS OF COMPENSATION

MANAGEMENT

I. Job Evaluation

II. Wages/salary surveys

III. Development and maintenance of wage structure

IV. Establishment of rules for administering wagesV. Wage incentives and profit sharing

VI. Wage changes and adjustments

VII. Supplementary payments

VIII. Control of compensation costs

IX. Other related items like promotions, relations with

supervisors


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Mistakes in compensation designingFirst mistake is the difficulty of organizations in

distinguishing between a bonus and an incentive. A

bonus is a surprise. An incentive is linked with somemeasurable outcomes.

The second mistake is the tendency of the

organizations to solve compensation claims on ad-hocbasis. Often organizations tend to comprise with the

talents doling out liberal compensation, creating

imbalance in the internal pay equity.

The third mistake in compensation design isstructuring of equity participation plan. Whether it

should be an expensing option, sweat option, phantom

stock, etc. often confuses the organization and

ultimately drains organizational resources.


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According to Thomas J.Bergmann (1988)

compensation consists of four distinct components

and they are:

wage or salary

employee benefits non-recurring financial rewards

non- financial rewards

COMPONENTS OF COMPENSATION


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COMPONENTS OF COMPENSATION

Components of compensation are:

Wages: aggregate earnings of an employee for a given period of time suchas a day, a week or a month. It includes basic wage and other allowances.

Salary: compensation paid to an employee for service rendered.

Employee Benefits: Indirect and recurring monetary rewards that an

employee receives from employment,eg.company contribution toretirement & insurance plans. These benefits are also called fringe

benefits.

Non-recurring Financial Rewards: monetary benefits an employee earns

through employment but that do not occur automatically (They are

earned only on occurrence of established measure of performance)

eg.special commissions ,profit sharing etc.

Non-pecuniary Rewards: those that can not be expressed in financial or

economic terms.eg-employee participation, challenging job etc.


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COMPENSATION STRUCTURE

FIXED

(A)

VARIABLE

(B)

BENEFITS

(C)

RETIRALS

(D)

DEDUCTIO

NS (E)

-BASIC

-HRA

-DA

-EDU. ALLOWANCE

-CAR/HOUSE

-PERFORMANCE

BONUS

-ASSURED

BONUS

-CAR/HOUSE

-INCENTIVES

-JOINING BONUS-LOAN

-LEAVE

ENCASHMENT

-Ex-GRATIA

-CAR/HOUSE

-MOBILE/TEL-PERTOL/DIESEL

-FOOD COUPONS

-LTA

-MEDICAL

-ESIC

-ESOP-PROFIT SHARING

-CAR/HOUSE

-PF

-GRATUITY

-PENSION

-SUPER

ANNUATION

-PROFESSIONA

L TAX

-PPF

ANNUAL GROSS:[(A+B+ D+ Medical +LTA + Mob/Tel/Petrol/Diesel)-E]

Net: [(A+B)-E]

CTC: Cost to Company(A+B+C+D)


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TYPES OF COMPENSATION

Two Types

Direct compensation

The employer exchanges monetary rewards for work

done.

Indirect compensation

Employer-provided benefitslike health insurance

that are provide employees for being a member of the

organization.


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DIRECT COMPENSATION

Basic Salary

House Rent Allowance

Conveyance

Leave Travel Allowance Medical Reimbursement

Bonus

Special Allowance


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INDIRECT COMPENSATION

Leave Policy

Overtime Policy

Hospitalization

Insurance

Travelling Leave Benefits

Retirement Benefits

Holiday Homes

Flexible Timings


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COMPENSATION SYSTEM


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COMPONENTS OF THE

COMPENSATION SYSTEM


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BASE Vs SUPPLEMENTARY COMPENSATION

BASE COMPENSATION

1. It denotes payments to workers in the form of wages and salaries

2. Wages and salaries are paid in cash

3. Wages and salaries are paid to compensate employees for their services

4. Wages and salaries are determined by JE, demand and supply of labour,

organisations capacity to pay, productivity, govt regulations etc

SUPPLEMENTARY COMPENSATION

1. It denotes fringe benefits to workers over and above their regular wages and

salaries

2. Fringe benefits are offered in the form of employee services and benefits

3. Fringe or non-wage payments are made to increase the efficiency of employees

and to retain them

4. Supplementary compensation are determined by the history of the

organisation, philosophy of management, organisations capacity to spend on

employees benefit, need to retain talented employees and desire to enhance

public image etc


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TOTAL REWARDS PROPOSITION

COMPENSATION RELATED

a. Merit based salary increase

b. Competitive market positioning

c. Joining bonus

d. Special technical premiums

e. Long-term incentives-Cash/Equity

f. Greater focus on Benefits management

g. Bi-annual salary reviews

NON-COMPENSATION RELATED

a. T & D opportunities

b. Providing special projects

c. Employee engagement activities

d. Other recognitions awards, one to one meeting with top management

e. Work-Life balance


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WAGES

Wage may be defined as a aggregate earning

of an employee for a given period of time such

as a day, a week or a month for the service

rendered by him to employer.

It is the payment made to the worker forplacing skill and energy at the disposal of an

employer.


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WAGES

There are two other terms Compensation orEarnings are used in place of wage.

The term Compensation includes everythingwhich an employee receives in return for hiswork.

The term Earnings relate to remuneration in cashor in time paid to the employee


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Minimum Wage In relevance to minimum wages act of

1948,minimum wage is that wage which must bepaid to the employee weather the company earn

any profit or not.

The rates are fixed according to the minimum wages

act of 1948.Example is as under(Oct-10-March2011):-

Sr. No.

Scheduled

Employment

Category of Basic

V.D.A.

Total

Minimum

workers Minimum Wages

Wages

1 Blanket Manufacturing

Skilled 149 19.03 168.03

Semi-Skilled 139 19.03 158.03

Un-Skilled 132 19.03 151.03

2 Bone Mills

Skilled 149 19.03 168.03

Semi-Skilled 139 19.03 158.03

Un-Skilled 132 19.03 151.03


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Living Wage

A living wage is one which should enable the earner

to provide himself and his family not only the

essential food, clothing & shelter but also a major

component including education for the children,protection against ill health, insurance etc.

In other words living wage provides the standard of

living and ensures good health of workers and

his/her family members.


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FAIR WAGE

It is the wage which is above the minimum wage butbelow the living wage.

The lower limit of fair wage is obviously theminimum wage and upper limit is set by the capacityof the industry to pay.


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IMPORTANT TERMINOLOGY

Task: It refers to a distinct work activity with an

identifiable beginning and end . for e.g.. Sorting a bag of mail into appropriate boxes.

Job: Job is an assignment of work calling for a set ofduties,responsibilities,and conditions that are different

from those of other work assignment .

For e.g. two salesmen who are performing similar duties and

who require similar training, experience and personalcharacteristics would be said to hold the same kind of job

though they may be working in widely separated parts of the

store.


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Position: A position is a set of duties and tasks

assigned to an individual.

There are as many positions as the number of persons in

an organization.

Thus, when several persons are engaged in similar work,

each one is to have the same job, but all have different

positions.

The term position is represented by a position-holder.


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Occupation/profession: This term is used in wider

sense. An occupation/profession refers to group of

jobs that are similar as to kind of work or that

possess common characteristics. E.g. Engineering /Medical

Job family: It implies jobs of a similar nature,e.g.

clerical jobs.


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PROCESS OF WAGE DETERMINATION

JOB

ANALYSIS

WAGE

ORSALARY

SURVEY

GROUP

SIMILAR

JOBS

INTO

SIMILARGRADES F

INE-

TUNE

RATESOFPAY

WAGE&

SALARY

ADMINISTRATIONR

ULES

PRICE

EACH

GRADE1

2

3

4

5

6


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STEPS INVOLVED IN DETERMINATION OF WAGE

JOB ANALYSIS

JOB DESCRIPTION &

SPECIFICATION

PERFORMANCE

STANDARDS

JOB

EVALUATION

WAGE SURVEYS

& ANALYSIS OF

ORGANIZATIONA

L PROBLEMS

WAGE

LEGISLATION

WAGE

STRUCTURE

RULES OF

ADMINISTRATIO

N WAGES

EMPLOYEE

APPRAISAL

WAGE PAYMENTS


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Theory ofWages


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Economic Theory of Wages

There are two key theories that explain why

salaries are the way they are in a particular

field. These two theories are:

1. Traditional theory of wage determination

2. Theory ofnegotiated wages


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1. Traditional theory of wage determination

In this theory the law of supply and demands

dictates salary.

Example: electricians / plumbers whose

specialized skill the people need are in great

demand and thus have a high wage


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2. Theory of Negotiable Wages

Those employees who work in unions where unionnegotiates salary on behalf of all workers fit in thistheory.

Different methods of wage payment are prevalent indifferent industries and in various countries. Theremay be payment by time or payment byresults/output.

Wages are fixed mainly as a result of individualbargaining or collectively bargaining or by state

regulations.

Contd


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How wages are determined has been the

subject of several theories of wages. The main

element of these theories may be summed upas follows:

1. Subsistence Theory

2. Wage fund theory3. The surplus value theory of wages

4. Residual Claimant theory

5. Marginal Productivity Theory6. The Bargaining theory of wages

Contd


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(1) Subsistence Theory

This theory is also known as Iron Law of Wages

given by David Ricardo(1772-1823).

This theory states that The laborers are paid to

enable them to subsist (survive) and perpetuate

(compete/continue) the race without increase or

diminution(reduction).

The theory was based on the assumption that if theworkers were paid more that subsistence wage ,their

numbers would increase; and this would bring down

the wages.Contd

Subsistence Theory


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Subsistence Theory

On the other hand, If the wage fall below the subsistence level,the number of workers would decrease as many ofwould die ofhunger, malnutrition, disease ,cold etc.

In economics, this theory of wages states that wages in long runwill tend to be the minimum value needed to keep the workersalive.

The justification of this theory is :Wage are higher More workers are produced

Wage are lower Some workers will die

Thus creating an equilibrium in both the case

Criticisms: Based on population.No consideration for the demand for labor. No emphasis on efficiency of workers.No explanation of wage differentials.

Contd

(2)W F d Th


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(2)Wage Fund Theory Adam Smith (1723-1790).

According to this theory the wages are paid out of a

predetermined fund of wealth which lay surplus with

wealthy personsas a result of their savings.

This fund can be utilized for employing laborers for work.

If the fund is LARGE wages are High If the fund is SMALL wages will be reduced

The size of the fund determines the amount of payment of

wages.

Criticisms:No emphasis on efficiency and productivity of labor. It is Unclear from where the fund will come. It does not explain the difference in wages at different levels. Contd


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(3)The Surplus Value theory of Wages This theory was developed by Karl Marx

According to this theory the labor was an article of Commerce, which couldbe purchased on the payment ofSubsistence Price.

The price of any product was determined by the labour time.

The laborer was not paid inproportion to the time spend on work, but much

less , and the surplus went over , to be utilized for paying other expenses.

The rate of surplus value , which is the ratio of surplus labour to necessarylabour, is also referred as rate of exploitation under the capitalist forincrease of production.

Criticisms:

Labour was treated as a commodity or as article.

Wages are not paid in proportion to the time spent.

No emphasis was given on efficiency and productivity of workers.

Contd


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(4) Residual Claimant Theory This theory was developed by Francis A. Walker(1840-1897).

According to this theory There are four factor of production viz. land,labour, capital, and entrepreneurship.

Wages represents the amount of value created in the production, whichremains after payment has been made for all these factors ofproduction.

Wages are nothing but the residue of total revenues after deducting all otherlegitimate expenses such as rent, taxes, interest and profits. In other words, labour is the residual (leftover) claimant(applicant)

Criticisms:Wages not dependant on the profits or the capacity of an organization.Workers efficiency and productivity were not taken into consideration.

Contd


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(5) Marginal Productivity Theory

This theory was developed by Phillips Henry Wicksteed

(England) and John Bates Clark(USA).

According to this theory wages are based upon anentrepreneurs estimate of the value that will probably beproduced by the last or marginalworker.

In other word it is assumed that wages depend upondemand and supply of labour.

Criticism: It is wrong to assume that more labour could be used without increasing thesupply of production facilities. Employer offer wages less than the marginal productivity of labour.

Contd


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(6) The Bargaining theory of wages

John Davidson formulated this theory.

Under this theory wages are determined by the relativebargaining powers of the workers or trade unions and ofemployers.

If the workers are stronger in bargaining process the wage tend tobe high ,in case employer plays a stronger role then wage tends tobe lower.

Basic wages, fringe benefits, job differentials etc tend to be determined bythe relative strength of the organization and the trade union. Criticisms:

If trade union is not strong enough to bargain with the management, theworkers would be paid less wages. Length of service of workers, efficiency, performance does not taken intoconsideration.


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Reward Management

Definition


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Definition Process through which there is formulation

and implementation of strategies and policiesto reward people fairly, adequately, equitably,

timely and consistently in order to achieve

organizational goals

Deals with the design, implementation, and

maintenance of the reward system (process

and practices) and aim to meet the needs of

employee and the organization both

Objective


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Objective To reward timely, sufficiently, equitably

To ensure consistency in reward mechanism To reward people for the value they create

To motivate people and get their commitment

To develop a desired performance culture

To bring harmony in peoples and organizationsobjective

To achieve organizational goals

To create reward system and strike a balancebetween financial and non-financial rewards

To introduce transparency

To reward objectively and remove subjectivity

Components of RM


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Components of RM Reward strategy

Provides a sense of purpose and direction and framework for reward system (policies, practicesand processes)

Is according to the organizational goals and is focused in developing the maximum value for the

organization regarding rewards) Reward system: consist of interrelated policies, processes and practices

Policies: market comparability, equality, approach to total reward (tangible & intangible),transparency, policies to performance, competence and skills, role of subjectivity

Processes: efficiency in evaluating the jobs and assessing the individual performance

Practices: combination of monetary and non-monetary rewards

Procedures: operated to ensure the system in place and operates efficiently, effectively andflexibly

Total reward: combination of financial and non-financial rewards focusing on the maximizing thecombined effort in optimum satisfaction of the various needs of the employee to enhance motivation,commitment, performance and satisfaction.

Direct

Basic pay, grade structure

Contingent or performance pay: dependent on individual performance

Indirect

Benefits and allowances

Job enrichment and enlargement

Non financial rewards: Training, career development, recognition

Process of RM


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Process of RM

HR strategyBusiness StrategyEnvironment Environment

Environment Reward Strategy

Reward Policy

Reward

Processes

Reward

ProceduresReward Practice

Forms of Rewards


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Forms of Rewards Individual:

Basic pay, incentives, Benefits Rewards attendance, performance, competence

Team:

Team Bonus

Rewards group co-operation

Organization:

Profit sharing

ESOPS (Employee Stock Options Program)

Gain sharing

Types of Rewards


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Types of Rewards Intrinsic rewards: Intrinsic rewards are less tangible, originate from

persons or job itself and reflect Herzberg motivators. Example of such

factors includes;

Variety in Job Content.

Sense of being a part of value adding process.

Believe that they are valuable members of a team.

Increased responsibility and autonomy.

Sense of accomplishment

Participation in setting targets and opportunities to achieve them.

Feed back information.

Recognition.

Opportunities to learn and grow.

Extrinsic rewards: Results from the actions of others, such as supervisions

are more easily controlled by managers. Examples include pay,

fringe benefits,

praise and

promotion.


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There has been a significant increase in basicsalary, hence deferred benefits.

Companies have restricted non-tax perks in

the form of reimbursement under variousheads Mainly focused at certain higher

levels

Companies provide higher annual increments. There has been a shift in incentives to

group\team incentives from individual based.

Compensation Trends in India

CONTD


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Company encourages employees to buy the cars

themselves through hire-purchase andinstallments are paid by company.

Medical benefits are common-tie up withinsurance companies-annual medical checkup

Companies sponsor employees for highereducation.

Companies reimburse books, periodicals etc.

Club membership in form of reimbursement

of one-time joining fee for one club plus themonthly/ annual subscription to one moreclubs is an attractive perk for seniormanagement. Companies also go for bulkcorporate club memberships.

CONTD-

Contd


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Contd

Substantial differentials in gross compensation of the

managerial level to the next lower levelPersonalized salaries out of a basket of options for

individuals at senior levels.

Significant increase in basic salary and hence in deferred

benefits.Soft furnishing allowance is being provided towards

purchase of curtains, carpets, cutlery and crockery etc., and

this is usually paid as an annual, non-taxable allowance.

Conveyance is an area, which provides a lot of scope forvariations. Practices with regard to provision of car, driver

and reimbursement of expenses on car, parking, cleaning,

petrol, and maintenance are covered under this category.


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Housing loans or interest subsidy is also provided

Reimbursement for travel for a holiday including accommodation

in guesthouses, transit flats etc, is practiced. In most cases, this is

used as a discretionary reward for exemplary performance ratherthan as a perk.

Pre-employment benefits for attracting good people include the

company picking up of all relocation expenses for the family,

transport of personal goods, assistance in locating housing,schooling etc.

Some trendy components like long-term paternity or maternity

leave, part and flexi-time employment options are also available.

The senior executives share introduction of profit sharing

schemes whereby when the company earns profits beyond acertain fixed level, the profit accrued, the average norm being 20 to

25% of the excess profit.

Stock options are also a rage in the market.


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Laws Affecting Compensation in India

Workmen's Compensation Act, 1923 (WC Act) Payment of Wages Act,1936

The Payment of Wages (Amendment) Act, 2005

Minimum Wages Act,1948

Employees' State Insurance Act, 1948

Employees' PF and Miscellaneous Provisions Act,1952

The Maternity Benefit Act, 1961 Payment of Bonus Act, 1965

Payment of Gratuity Act, 1972


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Documents

1 Compensation Introduction