chapter 16 -compensation

7/27/2019 Chapter 16 -Compensation

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COMPENSATION

ADMINISTRATION

Prof. Jamuna


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ANNOTATED OUTLINE

INTRODUCTIONCompensation is what employees receive in exchange for their contribution

to the organization. Generally speaking, employees offer their services for

three types of rewards

Base pay

Variable pay Benefits

Compensation Administration

The most important objective of any pay system is fairness or equity, generally

expressed in three forms

Internal equity: where more difficult jobs are paid more

External equity: where jobs are fairly compensated in comparison to

similar jobs in labour market

Individual equity: where equal pay is ensured for equal work


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Objectives of compensation planning

Attract talent

Retain talent

Ensure equity

Reward appropriately(loyalty, commitment, experience, risk raking and other

desired behaviours)

Control costs

Comply with legal rules

Ease of operation



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Equity And Pay Rates

Equity in pay rates could be achieved through five steps


Ensuring equity in pay rates Find the worth of each job through job evaluation

Conduct a salary survey through the following methods

Key job matching Key class matching

Occupational method

Job evaluation method

Broad classification method

Group similar jobs into pay grades(pay grades are groups of jobs within aparticular class that are paid the same rate

Price each pay grade by using wage curve(curve in a scatter diagramrepresenting the relationship between relative worth of jobs and wage rates)

Fix a pay rage for each grade (like pay for officer category I, II, III etc)


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Components of Pay Structure

The two essential components of pay structure are; basic wages anddearness allowance .the basic wage rate is fixed taking the skill

needs of the job, experience needed, difficulty of work, training

required, responsibilities involved and the hazardous nature of the job.

Dearness allowance it paid to employees in order to compensate

them for the occasional or regular rise in the price of essentialcommodities.


Components of pay structure in India

Under the Workmen's Compensation Act

Wages for leave period, holiday pay, overtime pay, bonus, attendance bonusand good conduct bonus

Under the Payment of Wages Act

Retrenchment compensation, payment in lieu of notice , gratuity payable on

discharge


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The following, however, do not come under the term wages

Bonus

Payments made under a profit sharing scheme

Value of house accommodation

Medical allowances

Travelling allowances

Any other sum paid to defray special expenses incurred by

the worker

Contribution to pension, provident fund

Any amenity or service excluded from the computation of

wages


Components of Pay Structure


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It is the process of managing a companys compensation (basecompensation as well as supplementary) programme Base

compensation, here, refers to monetary payments to employees in

the form of wages and salaries. It is a fixed, non-incentive kind of

payment calculated on the basis of time spent by an employee on

the job. Supplementary compensation signifies incentive payments

based on the actual performance of an employee.


Wage And Salary Administration


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Objectives

To establish a fair and equitable remuneration

To attract competent personnel

To retain present employees

To control labour cost

To improve motivation and morale of employees

To project a good image of the company


Wage And Salary Administration

Principles

Wage and salary plans be sufficiently flexible

Job evaluation being done scientifically

Wage and salary plans be always consistent with overallplans

Wage and salary plans being responsive to changingconditions


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Factors affecting compensationlevels


Factors influencing compensation levels

Job needs

Ability to pay

Cost of living

Prevailing wage rates

Unions

Productivity

State regulation

Demand and supply of labour


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Wage Policy In India

A wage policy offers certain guidelines for determining a wagestructure. The term wage structure refers to various pay scales

showing rages of pay within each grade. Three important elements of

wage policy in India need to be elaborated here

Minimum wage: Wage sufficient to sustain and preserve the

efficiency of the worker and offer basic amenities of life

Fair wage: It is above the minimum wage but below the living

wage. It is fixed, taking into account factors such as the

productivity of labour, prevailing wage rates, level of national

income and its distribution, the employers capacity to pay etc. Living wage: This is the highest amount of wages proposed by

the government, offering basic amenities of life and satisfying

the social needs of worker.



State regulation of wages

Institutions involved in fixation ofwages

Employer

Collective Bargaining

Legislation Minimum Wages Act

Wage Boards Payment of Wages Act

Pay Commissions Adjudication Machinery



Wage differentials

Differences in wage rates are inevitable in any industry and the

reasons are fairly obvious

Reasons for wage differentialsWage differentials Reasons

Interpersonal differentials Differentials in sex, ski lls, age, knowledge, experience

Inter-occupational differentials Varying requirements of skill, knowledge, demand-supply situation

Inter-area differentials Cost of living, abil ity of employers to pay, demand and supply situation, extent

of unionisation

Inter-firm differentials Abi li ty of emplo yer to pay, emp loyee s bargaining power, degree of

unionisation, skill needs, etc.


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Choices In Designing ACompensation System

The compensation that is followed by a firm should be in tune withits own unique character and culture and allow the firm to achieve

its strategic objectives. A variety of choices confront a firm here:

Internal and external pay

Fixed vs. variable pay

Performance vs. membership


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Guidelines for effective performancebased pay stems

To be fair to employees, organisations should keep the following guidelines in mind

while instituting merit-pay systems

Establish high standards of performance, so that only the truly outstandingemployees emerge as winners.

Develop accurate performance appraisal systems. The focus must be on job-

specific, results-oriented criteria as well as employee behaviours.

Train supervisions in the mechanics of carrying out appraisals and offering

feedback to employees in a proper way.

Tie rewards closely to performance.

Use a wide range of increases. Also, make pay increases meaningful.



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Suitability of job based vs. knowledgebased pay systems

A job based-pay system is suitable

when: Jobs do not change often

Technology is stable

Lot of training is required to learn agiven job

Turnover is relatively how

Employees are expected to moveup through the ranks over time

Jobs are fairly standardised withinthe industry

Individual-based pay system is suitable

when: The firm has relatively educated

employees with both the ability andwillingness to learn different jobs

The firm's technology, processes aresubject to frequent change

Vertical growth opportunities arelimited

Opportunities to learn new skillsexist

Teamwork and employeeparticipation are encouraged

Job vs. individual pay



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Broad banding vs. Competencybased pay system

Organisations that follow a skill-based or Competency Based Pay System frequentlyuse broad banding to structure their compensation payments to employees. Broadbranding simply compresses many traditional salary grades (say 15 to 20 grades)into a few wide salary bands (three or four grades). By having relatively few jobgrades, this approach tries to play down the value of promotions. Depending onchanging market conditions and organisational needs, employees move from oneposition to another without raising objectionable questions, (such as when the new

grade is available, what pay adjustments are made when duties change etc.) As aresult movement of employees between departments, divisions and locationsbecomes smooth. Employees with greater flexibility and broader set of capabilitiescan always go in search of jobs in other departments or locations that allow them touse their potential fully. Broad banding, further, helps reduce the emphasis onhierarchy and status. However, broad banding can be a little unsetting to a newrecruit when he is made to roll on various jobs. Most employees still believe that theexistence of many grades helps them grab promotional opportunities over a period oftime. Any organisation having fewer grades may be viewed negatively as havingfewer upward promotion opportunities. Moreover, a number of individuals may notwant to move across the organisation into other areas.


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Below market vs. above market compensation

Open vs. secret pay



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Managerial Compensation In India


Executive compensation is built around three factors in India

Job complexity

Employers ability to pay

Managerial productivity


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Executive compensation: Privatesector vs. Public sector

In a well publicised front page news sometime back The Economic Times mentionedabout the miserable salary levels of top executives in public sector units in India. For

example the State Bank of India chief is paid 10% of HDFC Bank Managing Director,

BHEL's chief getting about Rs.10 to 12 lakhs per year as against ABB's MD getting

nearly Rs.40 to 50 lakhs; Indian Oil Corporation's chief getting Rs.10 to 15 lakhs per

annum as against Reliance Industries' Ambanis getting a package of over Rs.10 crore

per annum. Salary levels in 'hot' private sector such as BPO, hospitality,biotechnology 'Media', IT, Telecommunications, Oil, Automobiles and Insurance are

way above the packages offered to executives in public sector for various reasons

such as: overstaffing, inefficient processes, pressure on margins due to competition,

appointment of people without requisite skills at the top level, political interference

especially in pricing the products or services, legal constraints etc.


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How to retain talent?

Improving communication

Changing work rules

Increasing pay and incentives

Ego massaging services

Non-poaching agreements

Opportunities to upgrade skills and knowledge

Offering jobs with stretch, pull and challenge

chapter 16 -compensation

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