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Compensation Management

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Job evaluation

This is assessing the value of one job in relation to another i.e.

comparing the value of one job with another for wage and salary

related decisions.

JE is the output of job analysis.

It is a formal and systematic comparison of jobs .

Job evaluation is the evaluation or rating of jobs to determine

their position in the job hierarchy. The evaluation may beachieved through the assignments of points or the use of some

other systematic method for essential job requirements such as

skills, experience and responsibility.

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Objectives

Determine the relative worth of the job

Ensuring fair wage /salary in relation to the work to be done

Ensuring just promotions and increments against the

performance or work done.

Reducing unequal wages and salaries on basis of race, sex,

religion or political differences

Reducing the differences in payment of wages and salary for

the same or closely related jobs and positions

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Principles of job evaluation

Rate the job and not the person. Each element should be rated

on basis of what the job requires.

All elements of the job should be clearly and well defined.

The elements selected for rating should be easily explainable.

Employees should agree to the rating.

Supervisors should participate in the rating process for theirown departments

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Advantages :

1. It is a logical method and helps in removing inequalities.

2. It helps in adapting new jobs into the system.

3. It improves labor management and worker morale.4. Leads to greater uniformity in wage rates and administration

5. Helps in selection and transfer and promotional procedures.

Disadvantages :

1. Rapid changes in technology have made it difficult to adjust

the demands.

2. When it is applied for the first time it creates doubts and

confusion in the people.

3. It takes a long time to implement.

4. It may be costly

5. Frequent evaluation of job factors is needed due to

fluctuations in various environmental factors 5


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Methods of job evaluation

1. Non analytical or non quantitative system

2. Analytical or quantitative system.

Non analytical in this comparison is made on basis of ranking

or classification. i.e. Ranking and Job classifications or grading

system.

Ranking system : In this the rater ranks the jobs from highest to

lowest without assigning point values.

Merits : This is a simple, quick method and suitable for smallorganizations. It is less expensive.

Demerits: There is lot of subjectivity as there is no set standard

for evaluation. It does not how much one job differs from other. 6


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Job classification or Grading system: In this, a number of pre-

determined grades or classifications are first established and then

the various jobs are assigned within each grade or class.

Job classification begins with the comparison of all jobs on the

basis of common sense and experience. For each class a general

specification is prepared with nature of work and responsibility

and salary range with minimum and maximum are allocated.

Grading system is established by first preparing the job

descriptions, then grade description, allocation of each job to a

particular grade and final suitability of the job.

Merits : Best suited to small organizations, employees understand

it easily and it is better than Ranking.

Demerits : Subjective, rigid , not suitable for large organizations.

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Analytical or quantitative system: In this various factors of a job are

considered and points are assigned to them according to their

relative worth.

There 2 types of qualitative systems :

Point rating system

Factor comparison system

Point rating system : This is based on the assumption that is

possible to assign points to different factors and degree of all

factors involved in jobs . The total of points gives and index of the

relative value of the jobs.

Merits : individual factors of job are evaluated, gives a numerical

basis for wage differences, fairly systematic and objective.

Demerits:Workers may not understand it easily, it is time consuming

and difficult task, tends to be inflexible. 8


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Factor comparison system : This method begins by finding out the

major factors which are present in more or less degree in all the

jobs in a particular organization.

Each job is ranked several times once for each compensable

factor selected e.g. mental requirements, skills required,

responsibility etc. Then relative difficulty of each job is decidedin terms of point rankings and money value is assigned.

Merits : systematic, quantifiable and fairly easy to explain to

employees.

Demerits : It is expensive and time consuming.

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Essentials for success of job evaluation programme

It must be carefully established by ensuring that the managements

aims are clear to all concerned and all the relevant internal and

external factors have been taken into account.

Both employees /trade unions and management should have

approved it.

There should be regular updating of new jobs and changed jobs.

Wage surveys should be conducted regularly

Before launching the job evaluation programme it should bedecided which category of employees are to be covered and up to

what range, who will evaluate the job? To what extent will the

employees be involved and finally does the company environment

and culture support such an initiative.

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Uses of Job evaluation.

Determining the internal pay relationships

It can help in implementing the pay policies.

It can help in deciding incentive or bonus plans

It helps the managers in managing day to day problems and

helps in reducing the employee grievances.

It helps company to compare the pay scales with othercompeting companies.

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Wage and Salary Administration

Wage : Wage is defined as The remuneration paid by the

employer for the services of hourly, daily, weekly and fortnightly

employees. It also means remuneration paid to production and

maintenance or blue collar employees.

Salary : This is defined as remuneration paid to the clerical and

managerial personnel employed on monthly or annual basis is.

As such wage and salary can be defined as the direct

remuneration paid to an employee for compensating his

services to an organization. Salary is also basic pay.

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Components of Compensation

Wages and salary : wages are hourly rates and salary isunderstood as monthly earning irrespective of the hours put in.

Incentives: It is payment by results. Incentives are paid in

addition to wages and salaries, and are depend on productivity,

sales, profits or cost reductions etc.

Benefits: PF, gratuity, medical care, hospitalization, accident

relief, canteen, uniform. Perquisites are for executives and

include car, driver, club membership etc.

Non-monetary benefits: Growth prospects, recognition,

flextime, good working conditions etc.

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Factors influencing Compensation

Compensation

Internal factors

Business Strategy

Employee

Ability to pay

Productivity

Job evaluation

Union pressure

External factors

Labor market & Union

Cost of living

Comparable industries

Economy

Legislature

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2007 Thomson/South-Western. All rights reserved.

915

Total Compensation

Direct Indirect

Bonuses

Gainsharing

Security Plans Pensions

Employee Services Educational assistance Recreational programs

Commissions

Wages / Salaries

Insurance Plans Medical Dental Life

Time Not WorkedVacations Breaks Holidays


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2007 Thomson/South-Western. All rights reserved.

916

Compensation Management and

Other HRM Functions

Pay rates affect selectivity SelectionSelection standards affect level

of pay required

Pay can motivate trainingTraining and

Development

Increased knowledge leads to

higher pay

Training and development may lead

to higher pay

Compensation

Management

A basis for determining

employees rate of pay

Aid or impair recruitment RecruitmentSupply of applicants affects

wage rates

Low pay encourages unionization Labor RelationsPay rates determined through

negotiation


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Objectives of Wage and salary administration

1. To acquire qualified competent personnel

2. To retain present employees

3. To secure internal and external equity

4. To ensure desired behavior

5. To keep labour and administrative costs in line with the

ability to pay

6. To be seen as Progressive employers

7. To pay according to the content and complexity of the job

8. To help in planning and administering the pay roll in terms ofbudgeting.

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Methods of wage payment :

There are two ways of compensating the workers :

Time wage and Piece Wage

Time wage : This is based on the amount of time spent. Wage is

measured on the basis of unit of time e.g. per day , per month,they are not dependent on the performance of the employee.

Merits : It provides sense of security to workers, is conducive for

better labour management and enough attention will be given to

quality.Demerits : No incentive to worker to do more, it requires strict

supervision.

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Piece wage system : This is based on the amount of work done and

the earnings are directly proportional to his output . It can offer

direct connection to effort and reward.

Merits : Simple and easy to understand. Provides incentive to work

more.

Demerits: Danger of overwork, and can lead to accidents. Lot ofsupervision is needed to ensure quality output and it can affect

quality of work in trying to get more done.

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Incentive wage plans : A system of wage payment which would

maintain both quality and quantity is called Incentive wage plan

and it is a combination of both time and piece wages.

Essentials of good wage incentive plan :

1. Measurement of the amount of work done2. Establishment of standard output on the basis of which the

incentive has be worked out

3. Setting up of a suitable rate of incentive.

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Objectives of Wage incentive schemes

1. To improve the profit of a firm through a reduction in costsof labour and materials

2. To avoid or minimize additional capital investment for

expansion of production capacity

3. To increase a workers earnings without affecting the

established wage rate structure

4. Better utilization of manpower, higher production, and

better performance control .

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Types of Wage Incentive Schemes :

1. Simple Incentive plan

2. Sharing Incentive plan

3. Group Incentive plan

Simple incentive plan : This is a simple piece rate system in which

the basis of computation is the rate per piece multiplied by the

number of pieces produced.

Sharing incentive Workers exceeding the standard or even just

attaining it are entitled to higher rate and those whose output is

less than standard output are paid lower rate.

Group Incentive : When several workers are required to perform

jointly them this incentive is used. The total earnings for the group

are determined and if all the members are of equal skill then it is

equally divided. 22


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Requisites of the success of Incentive plan

1. Relations between management, supervisory staff and workers

must be cordial2. The set standards should be attainable, necessary tools,

equipment, training etc should be given.

3. Incentive plan should reward employees in direct proportion to

their performance.

4. The rewards should be given immediately for best effect

5. Work standard once established should be constant and should

be strictly followed.

6. The incentive payments should be large enough in relation to

the employees existing income.7. The incentive plans should not be harmful to the health or

wellbeing of the employees

8. A guaranteed base rate should be included in any plan to offer

security to the employees. 23


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Fringe Benefits : Fringe benefits are additional benefits and series

that are provided by a company to its employees in addition to

their direct salary usually on basis of their performance.

One of the advantages of fringed benefits is that they are not

taxed. Companies therefore use these to attract and retain the

employees. Fringed benefits can be monetary or non monetary.

Monetary health insurance, unemployment compensation, sick

leave, maternity leave, vacations, cars etc.

Non monetary: free lunches, coffee breaks, birthday oranniversary gifts /treats, Company watches, wallets etc.

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Importance of Fringe Benefits :

Fringe benefits are important to the employees because they are :

They are the payment for the time employee has not worked : this

can be in the form of on the job payment and off the job time

payment. On the job can be like vacations.

Insurance benefits : which can save the employees lot of money.

Compensation benefits : such as disability and injury benefits can

help the employees in case of accidents.

Pension plans : Companies can give supplementary income after

retirement.

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Transfer

Transfer is change in a job assignment, but it does not involve

change in responsibility and status.

An employee is moved to an equivalent position at periodical

intervals to make them more effective or to use the resource more

effectively.

Transfers may be organization initiated or employee initiated.

It may be defined as a change in assignment in which the

employee moves to another job at approximately the same level

of responsibilities, skills needed or compensation.

It may be permanent or temporary.

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Types of transfers :

General - this is usually based on duration or specified time

where in the employees complete a given period or service time.

Production usually from one department to another as per

demand usually to avoid layoff of efficient employees.

Replacement - these are to replace persons who have left due to

resignations, retirement, dismissals etc.

Shift- workers generally dislike 2 or third shift as it affects its

participation in social life , so shift are effected.

Remedial - Initial transfer may be faulty or inappropriate so

corrective action is taken.

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Versatility - to give varied experience to the employee and to

give the employee a broad experience.

Penal / punishment transfer as form of punishment and

they are made to work in areas of risk or hazard.

Request more personal in nature and done to help theemployee in looking after his family or such related problem

Mutual transfer - two employees agree to change places

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Transfer procedure:

Intra departmental : These are from one section to anothersection of the same department.

Intra departmental : These are from one department to another

within the same organization.

Branch transfers : these are from one branch office to another

which could be another city, region or even country.

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Promotion

This is transfer of the employee to a new position which

commands higher pay, privilege or status as compared to

earlier.

A promotion is the transfer of the employee to a job which pays

more money or one that carries some preferred status

It is a term which covers a change and calls for greater

responsibilities and usually involves higher pay and better

terms and conditions of service and therefore a higher status orrank.

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Types of promotion

Limited - It is known as Upgrading and offers increase in pay

and responsibility on the same job or moving higher without

changing the job.

Dry promotion no increase in promotion but may be new title

is given. These are often given in place of salary increases.

Up and out promotion It often leads to termination of

services. It implies either move up or out.

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Bases of promotions :

1. Seniority: this is based on the length of service and job

experience.

2. Merit: Employees are promoted based on their

performance and record.

3. Merit cum seniority: This is mix of both seniority and merit

and length of service and performance both are given

equal weightage.

4. By selection: Employees are promoted using tests and

specific selection criteria.

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5. Time bound promotion : Employees are promoted

according to the standards of time set for promotions tohigher level on the condition that they have minimum

qualifications set by the company.

6. Temporary promotion: Employees are promoted temporarilyto higher positions in case there are vacancies and if they

are due for promotions. Such promotions are no guarantee

for permanent promotion if a better fit employee applies or

is selected.

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Promotion Policy:

There should be a clear statement of the same.

The policy must consider a balance of internal promotions and

external hiring.

Employees must be communicated the policy

Bases for promotion should be well defined and clear.

Relationship of disciplinary action to promotion.

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Demotion

This is a process by which an employee is downgraded and sent to

a lower position form his current position. It can be forinefficiency, incompetence etc.

Demotions are a serious penalty and can have negative impact on

the individual. They need to be handled tactfully.

It is the assignment of an individual to a job of lower rank and

pay usually involving lower level of difficulty and responsibility.

It is a downward assignment in the organization's hierarchy to alower level job which has less responsibility , pay and status.

Because oft this hierarchical repositioning it has a negative

connotation and may lead to employee dissatisfaction.

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Causes of demotion :

1. It may be due to the need for disciplinary action

2. It may be needed when the employee is unable or unwilling

to do his job properly.

3. If the company reduces some activities it may be required to

retain employee and reduce costs.4. If the employee is promoted and is unable to cope up he may

be demoted.

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Conditions for demotions :

1. Serious violations in the rules and regulations of the

organization should result in demotion, and should not be

used for reason like poor attendance or insubordination.

2. There should be a proper and detailed investigation of any

charges in terms of violation of rules.

3. In case violations occur there should be a consistent and

equitable application of the penalty .

4. There should a provision for review.

5. Demotions have a negative and serious effect on employee so

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Separation

Separation means cessation of service of agreement with the

organization and can be result of Resignation, discharge,dismissal, retrenchment, layoff, golden handshake and

retirement.

Resignation : When the employee chooses to terminate therelationship with the employer i.e. it is voluntary it is called

resignation. It can be for various reasons like health, marriage,

better prospects or maladjustment to the company.

Discharge: Discharge involves permanent separation of

employee from the organization because of poor performance,

violation of rule, poor code of conduct or reduced

employment opportunities.

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Dismissal : When the termination is issued by the company it is

called dismissal and it is generally understood as a way of

punishing the employee for misconduct or prolonged absence

from duty. This is a drastic step and therefore should be

sufficiently supported with facts.

Retrenchment : This is termination of the service due to

redundancy. It is a permanent termination of the service foreconomic reasons. Retrenchment is applicable only when the

employee deemed to be superfluous or his work is now

redundant.

Layoff: Layoff means the indefinite separation of employee from

the payroll due to factors beyond the control of the employer.

The employee is expected to be called back to work in near

future. Some of the factors which may be beyond the control of39


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The employer are fluctuations in market resulting in loss of sales,

shortage of raw material or power or accumulation of stock,

breakdown of machinery etc.

Golden handshake : In this the employees who have completed

certain minimum length of service can opt for voluntary

retirement and get a sizable compensation from the employer as

well. Golden handshake is usually offered by the government to

reduce the size of bureaucracy and close down sick / loss making

units.

Retirement : The retirement age is now 58 -60 years. Someemployer may extend the age upward or downward. Employees

should be informed in advance about pension plans and

insurance benefits after retirement.

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Absenteeism

Failure of a worker to report to work when he is scheduled to

work.

Absenteeism is the total man shifts lost because of absence as a

percentage of total number of man shifts scheduled to work.

Absenteeism rate = no. of man days lost/ number of man days

scheduled to work * 100

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Causes of Absenteeism :

1. Maladjustment with the working conditions2. Social and religious ceremonies

3. Unsatisfactory housing facilities in urban areas

4. Unhealthy working conditions

5. Poor welfare conditions

6. Alcoholism

7. Indebtness

8. Maladjustment with job demands

9. Unsound personnel policies

10. Inadequate leave facilities11. Low level of wages.

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Measure to Reduce Absenteeism:

1. Right selection of employees in terms of his aspirations, valuesystems, responsibility etc.

2. Following a proactive approach in identifying and redressing

employee grievances.

3. Providing fair wages and allowance

4. Providing safety and health measures

5. Maintaining cordial worker relations and industrial relations

6. Educating workers

7. Offering attendance bonus

8. Providing extensive training and encouragement foradvancements.

9. Improving communication network particularly upwards

10. Providing hygienic work conditions.

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Labour turnover

Labour turnover is the rate of change in the number of

employees of company in the definite time period.

It is a measure of the extend to which old employees leave and

new employees enter the service of the organization

It is the cause and effect of instability of employment apart frombeing a measure of the morale and efficiency otherwise of

worker.

Labour turnover involves costs not only in human values butalso in money and includes costs incurred in hiring, training,

overtime for regular workers to maintain production, loss of

production when employee leaves and expense in equipment or

facilities not being fully utilized.44


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Causes of Turnover :

Resignations : This may be due to dissatisfaction with working

conditions, wages, opportunities etc. It can also be because lot of

workers still come from rural agricultural areas . They go home

for religious ceremonies, harvesting or sowing and when they

return they do not get their old jobs back.

Dismissals : This may occur due to participation in strikes or union

activities, misconduct, insubordination or inefficiency.

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Measures to reduce labour turnover

Increase pay levels to meet competitionIntroduce rewards for performance

Provide better career opportunities

Encourage worker organization to address their grievances

Improve working conditions

Improve recruitment and selection

Provide adequate training and development.

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