Module 1 Compensation n Reward

8/10/2019 Module 1 Compensation n Reward

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INTRODUCTION

TO

COMPENSATION

MANAGEMENT



Topics covered after the learning:

1.Concept of Compensation

2. Component of compensation

3. Objective of compensation

4. Supplementary compensation

5. Factors influencing compensation

6.Concept of Reward and Reward

System,

7.Economic Theory of Wages.



CONCEPT OF

COMPENSATION Compensation is what employees

receive in exchange for their contributionto the organization

An employee‟s standard of living, statusin the society, Motivation, Loyalty andProductivity depend upon thecompensation he/she receives

For the employer to employeeremuneration is significant because ofit‟s contribution to cost of production



NATURE OF

COMPENSATIONCompensation can be offered by anorganization both directly( Base Pay &Variable Pay) and Indirectly (Benefits)

1. Base Pay -Basic compensation an

employee gets usually as a wage orsalary

2. Variable Pay -Compensation linkeddirectly to the performance

3. Benefits- Indirect rewards given as apart of organizational membership (health insurance, vacation pay,retirement pension etc.)



Compensation components :

diagrammatic representation





Cont…

Compensation can be offered by anorganization both directly(Basic wage i.e.

Base Pay & Variable Pay) and Indirectly

(Benefits)

1. Base Pay -Basic compensation an

employee gets usually as a wage or salary

2. Variable Pay -Compensation linked

directly to the performance3. Benefits- Indirect rewards given as a part

of organizational membership ( health

insurance, vacation pay, retirement

pension etc.)



Supplementary compensation

Supplementary compensation involves “fringe Benefits” offered through several

employee services and benefits such as

housing, subsidized food, medical aid,

crèche etc.

Basic purpose:

to attract and maintain efficient human

resource with the organization To motivate the human resource.



Types of supplementary

compensation1. Payment for time not worked : paid rest

period, paid lunch period, vacation,

holidays ,sick leave, personnel leave,

voting leave etc.

2. Hazard protection: protection against the

hazards of illness, injury,

debt,unemployment,permanent disability,

old age and death3. Employee services: housing, food,

medical, recreation, low cost loan etc.

4. Legal payment



Cont..

Perquisites or perks includes several newbenefits such as club membership,

company apartment, car, corporate aircraft,

home security, company credit card,

entertainment etc.

Differences between Base Compensation &

Supplementary compensation

1. Base compensation denotes payments toworker in the form of wages and salaries

while supplementary compensation denotes

fringe benefits to worker over and above

their regular pay.



Cont..

2. wages and salary are paid in cashwhile fringe benefits are offered in the

form of employees services and

benefits such as housing, medical aid,canteen, crèche etc..

3. Base compensation are given to

employee for their services whereas the latter is given to increase the

efficacy of employees and to retain

them in long run.



Cont…

4. Wage and salary are determined onthe basis of job evaluation whereas

the latter is determined on the

organization philosophy ofmanagement, capacity to spend on

employee benefits etc.



NON MONETARY

Enhance dignity & satisfaction from workperformed.

Promote social relationship with co-

workers. Allocate sufficient resources to perform

work assignments

o Offer supportive leadership & management.

Enhance physiological health, intellectual

growth.



SOME OBJECTIVES of

compensation….. 1.Internal Equity- Ensures that more difficult jobs are paid more.

2.External Parity- Aims to compensate fairly in comparison to

similar jobs in labor market.

3.Individual Equity - Equal Pay for equal work.

Other objectives in addition…. To attract talent

To retain talent

Ensure equity

To motivate new & desired behavior

Control cost

Comply with legal rules

Ease of operation



IMPORTANCE of Compensation

system Job description

Job analysis

Job evaluation

Pay structure

Salary surveys

FACTORS INFLUENCING EMPLOYEE



FACTORS INFLUENCING EMPLOYEE

COMPENSATION

i. job need: job is always rated on the basisof their difficulty, challenge and complexity

ii. Ability to pay

iii. Cost of livingiv. Prevailing wage rate

v. Unions

vi.Productivity

vii. State Regulation

viii. Demand and supply of labor



Dimensions

•Pay for Work & Performance

•Pay for Time not Work

•Disability Income Continuation

•Deferred Income

•Health, Accident & Liability Protection

•Income Equivalent Payments – Perks



COMPENSATION PLAN

Develop a program outline Designate an individual to oversee

Develop a compensation philosophy

Conduct a job analysis of all positions

Evaluate jobs

Determine grades Establish grade pricing and salary range

Determine an appropriate salary structure

Develop a salary administration policy

Obtain top executives' approval of the basic salaryprogram

Communicate the final program to employees andmanagers

Monitor the program



CONCEPT

OF

REWARD



Reward….

Reward is a composite of allorganizational mechanism and

strategies used to finally acknowledge

employees behavior and performance.



OBJECTIVE OF REWARD

To motivate employees to performeffectively

To motivate employees to join the

organization To motivate employees to continue to

work

Enhance Loyalty Satisfaction



Cont…

Financial Rewards

+

Non Financial Rewards

=

Total Reward



FINANCIAL REWARDS

A number of monetary benefits offeredto employees to obtain short term and

long term commitment.

Types of financial rewards given are;base pay, variable pay, share

ownership, bonus, etc.



NON FINANCIAL REWARDS

Non-financial rewards cater mainly tofulfill the psychological needs of the

employees.

Types of non financial rewards givento employees are; recognition,

opportunities to develop skills, quality

of work life, etc.



REWARD SYSTEM



WHY REWARD SYSTEMS?

Attracting, retaining & motivatingemployees

To get desired behavior

To achieve stretched standards

To cater to individual needs



REWARD MECHANISMS

Praise/recognition from supervisors

Challenging work assignments

Promotions and lateral moves

Paid leave to employees



Designing Reward System

Whom to Reward?•Individual Employees

•Teams

•Organization



Designing Reward System

What to Reward?◦ Performance

◦ Organizational Level

◦ Unit / Departmental Level◦ Speed and Efficiency

◦ Loyalty

◦

Innovation◦ Upholding Values



Cont..

◦ Technical Solution

◦ Learning

◦ Good Behavior

◦ Teaching◦ Publications

◦ Event Management

◦

Social Concern ( CSR)



Characteristics of rewards

Rewards must have the followingcharacteristics

◦ Value

◦ Relevant◦ Purpose

◦ Behavioral effect

◦

Recognition



Concept of Total Reward

SystemTotal Reward Strategies should include

◦ Direct Financial

◦ Indirect Financial

◦ Identification◦ Work Content

◦ Career Opportunities



Wage Determination Theories

Acc. To Prof. J. Dunlop the history ofwage theory may be divided in to 3periods :

1. Up to 1870 , Which was dominatedby WAGE FUND THEORY

2. 1870-1914 : THEORY OFMARGINAL PRODUCTIVITY

3. 1914- till date : Process of Collectivebargaining & Keynesian Equity & theGeneral Wage Level & Employment.



Subsistence Theory by David

Ricardo(1772-1823)

Also called as “Iron Law of Wages” Assumptions

1. Law of diminishing returns apply to the industry.

Consider a factory that employs laborers to

produce its product. If all other factors of

production remain constant, at some point each

additional laborer will provide less output than the

previous laborer. At this point, each additional

employee provides less and less return. If newemployees are constantly added, the plant will

eventually become so crowded that additional

workers actually decrease the efficiency of the

other workers, decreasing the production of thefactor .





Cont..

This theory states that “ The laborersare paid to enable them to subsist &

perpetuate the race without increase

or diminution”. According to thistheory , if the wages fall below the

subsistence level, the number of

workers would decrease as many ofthem would die out of hunger

,disease or malnutrition. This would

make the wage rate go up as labour

will become scare.



Cont..

However, if the workers are paid morethan the subsistence wages, they

would marry and procreate and this

would increase their number and bringdown their rate of wages.

The Theory has been criticized on the

basis of unrealistic assumption.



Wage Fund Theory by Adam

Smith(1723-1790)

It assumes that there is a predetermined fundof wealth which lays surplus with wealthy

persons as a result of savings & wages

are paid out of it.

MAGNITUDE of Wage fund determines:-

1. Demand of Labor

2. Wages paid to the labor, higher the fund

higher would be the demand for labor &wages paid to the labor & vice versa.



Cont..

Wages depends on Demand &Supply of Labor.

Wage fund is fixed

So to increase the wages 2 thingscan be done-

1. Large size of wage fund

2. Reduction in labor



Cont..

Criticism It is not clear from where wage fund

will come.

No emphasis on efficiency &productivity

Unrealistic assumption.



Surplus Value Theory by Karl

Marx(1818-1883)

Acc to this theory Workers was anarticle of commerce which could be

purchased on the payment of

subsistence price. The price of any product is determined

by the labor time needed for

producing it. The workers were not paid acc to their

contribution.



Cont..

CRITICISM Labor is treated as commodity

Price can not be determined by labor

time No emphasis on productivity



MARGINAL PRODUCTIVITY THEORY by P H

Wicksteed (England) & J B Clark(USA)

It assumes that wages depend uponthe demand for & supply of Labor.

“Wages are based on entrepreneur „s

estimate of the value that will beproduced by the last or marginal

worker”

wages are paid on the base ofeconomic worth





Homogeneous factor of production Full employment of resources

Perfect competition

Perfect mobility of factor of production

Law of diminishing returns

Perfect knowledge





CRITICISM No importance to supply of labor

In practice employer gives lower

wages than marginal productivity oflaborer

Unrealistic assumptions



Residual Clainmant Theory by Francis A Walker(1840-

1897)

4 factor of production-land ,labor, capital &entrepreneurship.

Wages = value of production – (rent+

interest+ profit)

Criticism

Demand & supply factor ignored

Based on wrong notion of residual

claimant

Productivity & efficiency ignored.



Investment Theory by H M Gitelman

Acc to this theory workers are paid in termsof their investment in education, experience

& training.

Worker must be having attributes.

Higher attributes higher payments.



Bargaining Theory of Wages by John

Davidson

Acc. To this theory Wages aredetermined by relative bargaining

power of workers or trade unions and

of the employers. Applicable in organized sector.

If union is strong workers will be paid

more. & vice versa.



The Contingency Theory

No single best way to evolve thepayment system

Acc to Lupin & Bowey” essentially, a

contingency approach is that in someindustry & in some envt conditions one

managerial practice will contribute to

some desired objectives while thesame will not happen in other industry.



Demand & Supply Theory

Al fred Marshall , the chief exponent to this theory, explained thecomplexity of the economic world tried to provide a less rigid &deterministic theory. According to him, the determination of wagesis affected by the whole set of actors which govern demand for &supply of labour. The demand price of labour, however, determined

by the marginal productivity of the individual worker

The term “supply & labor” can be expressed in a number of senses.First, it refers to the number of workers seeking employment; theseare the workers who have no alternative livelihood & join the labormarket seeking employment for wages. Secondly, “supply & labor” may refer to the number of hours each worker is available for work.The supply of labour in this sense increases with any increase in the

number of working hours.



Agency theory

This theory focuses on the divergentinterest i.e. goal of the organization,

stake holder and the way employee

remunerations can be used to alignthese interest and goals. Employer

and employee are the two

stakeholders of a business unit, the

former assuming the role of principle

and the latter the role of agent. The

remuneration is paid to the employee

in the agency cost.



THANK YOU..

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Module 1 Compensation n Reward