Compensation Management

ASHISH GOEL 14020241019

BHAWANA SHARMA 14020241020

PRAKSHI GUPTA 14020241021

RAMNEEK SAHIM 14020241023

SETHUNATH S. 14020241024

ARUN V MENON 14020241042

Compensation is the remuneration an employee receives for his or her contribution to the organisation.

Employee compensation is a better term than employee benefits or wages or salaries. What the employee provides the employer is a labour service, usually known as work

Compensation Management is more than just the means to attract and retain talented employees. In today’s competitive labour market, organizations need to fully leverage their human capital to sustain a competitive position. This requires integrating employee processes, information and programs with organizational processes and strategies to achieve optimal organizational results.

Remuneration is another term synonymously used with compensation.

What is Compensation

•Organisation should have a compensation philosophy of its own that guides administration of monetary and non-monetary benefits.

•Refers to a set of beliefs and guiding principles and which are consistent with the objectives of the organisation

•The compensation philosophy needs to achieve equity, transparency , and consistency in payment of compensation to the employees.

Compensation Philosophy

DIRECT

Compensation Components

INDIRECT

FINANCIAL NON -FINANCIAL

Direct compensation

1.Basic salary2.Bonus

5.Leave travel allowance6.Special

allowance

3.Medical re-Imbursement4.House rent allowance

1. Wage and Salary Wages represent hourly rates of pay , and salary refers to the monthly rate of pay irrespective of the number of hours put in by an employee. Wages and salaries are subject to annual increments .

2.Incentives Also called ‘payment by results ‘ incentives are paid in addition to wages and salaries. Incentives depend upon productivity, sales, profit or cost reduction efforts.

There are A) Individual Incentive Schemes B) Group Incentive programme

Allowances :

Apart from dearness allowance, other allowances such as House Rent Allowance (HRA) , Conveyance Allowance and Leave Travel Allowance (LTA) are also part of compensation.

House Rent Allowance :

Leave Travel Allowance:

Conveyance Allowance :

Indirect compensation

1.Overtime policy2.Retirement Benefits

3.Hospitalization4.Insurance

5.Holiday Homes6.Flexible timing

Non-MonetaryIt includes-• Restaurant coupons• Relocation costs• Movie tickets • Recognition of birthdays • Free lunches, snacks, or beverages • Coveted parking spaces• Outstanding employee plaques• Employee discounts

• Apart from all many skilled laborers will not agree to work if they do not have at least a simple benefits package available to them. It is standard in U.S. culture to offer a basic amount of non-monetary benefits to full-time, permanent employees

Theories of CompensationReinforcement Theory:

• A behavior that has a rewarding experience is likely to be repeated .

Expectancy Theory:

• This concentrates how motivation is depended upon Expectancy,Performance,Valence.

Equity Theory• Equity is balance between the inputs an individual brings to a job & the outcomes he or she

receives from it.• Employees inputs includes experience, education, special skills, efforts and time worked.• Outcomes includes pay, benefits, achievement, recognitions, and any other rewards.• Inputs and outcomes are in different units, and are hard to compare to each other directly.• Equity theory suggest that individuals determine whether they are being fairly treated by

comparing their own inputs/outcomes ratio to the input/outcome ratio of others

Types of Equity• Three element of equity can be distinguished as external, internal and individual.

• External equity refers to comparison of similar jobs in different organizations. • Internal equity refers to the relationship among the jobs within a single organization.• Individual equity refers to comparison among the individual in the same job with the same

organization

ConsequencesPerson Comparison OthersMy Rewards(outcomes) Other’s Rewards EquityMy Contributions(inputs) Other’s Contribution

My Rewards(outcomes) Other’s Rewards InequityMy Contributions(inputs) Other’s Contribution (under reward)

• Action to restore equity from Inequity• Person could ask for a raise in salary.• Person could reduce contributions (work less hard)• Person could try to get others to increase contribution(work harder)• Last resorts : quit or choose another comparison other.

Agency Theory• Employers assumes the role of principals and employees that of agents.

• Primary objective is choose a contract that aligns agent’s interest with that of principal’s.

• Types of contracts:• Behavior oriented• Outcome oriented

Importance of ideal Compensation System An ideal compensation system will have positive impact on the efficiency and

results produced by employees. It will encourage the employees to perform better and achieve the standards fixed.

It will enhance the process of job evaluation. It will also help in setting up an ideal job evaluation and the set standards would be more realistic and achievable.

It aims at creating a healthy competition among them and encourages

employees to work hard and efficiently.

Importance of ideal Compensation System Sound Compensation/Reward System brings peace in the

relationship of employer and employees.

It promotes employees to set higher goals of performance.

The perfect compensation system provides platform for happy and satisfied workforce. This minimizes the labour turnover. The organization enjoys the stability.

The organization is able to retain the best talent by providing them adequate compensation thereby stopping them from switching over to another job.

FACTORS INFLUENCING EMPLOYEE COMPENSATION

LABOUR MARKETS• The labor market reflects the forces of supply and demand for qualified labor

within an area. These forces help to influence the wage rates required to recruit or retain competent employees. It must be recognized, however, that counter-forces can reduce the full impact of supply and demand on the labor market.

• Going rate : These are wages that is paid by different units of an industry in a locality and by comparable units of the same industry located elsewhere.

• Productivity influences wage fixation as the effort or productivity increases incentive also increases.

LABOUR UNIONS AND COLLECTIVE BARGAIN• Labor union is to bargain collectively over conditions of employment. The union’s goal in

each new agreement is to achieve increases in real wages. wage increase larger than the increase in the CPI, thereby improving the purchasing power and standard of living of its members.

• Union pressure frequently forces management to increase efficiency and thus the organization's ability to pay. Where this "shock effect" cannot occur because of unchangeable economic conditions or company conditions

• Unionism has a moderate effect, on the order of 12-25 percent.• Induces “spillover effect” (i.e. The effect of unions on nonunion wages) ensuring

"standard rate" • When General Electric's President wrote a letter to all 20,000 GE subcontractors in

December of 1999 and suggested, recommended, and warned them that they should consider moving their plants to Mexico (and its non-union environment), it does not take any genius to forecast the role of manufacturing unions in the future.

LABOUR LAWS• Payment of Wages Act,1936 : Regulates the payment of wages and also protects against

irregularities and unauthorized deductions. Act ensures payment of wages at regular interval.

• The minimum wages act,1948 : Enables central and state governments to fix minimum wages payable to certain class of employees.

• The payment bonus Act,1965: Ensures payment of specified rate of bonus in certain establishments.

• Equal Remuneration Act, 1976 : Ensures equal remuneration to men and women.• The payment Gratuity Act, 1972 : Ensures Gratuity to employees after superannuation.

Cost of Living• Because of inflation, compensation rates have had to be adjusted upward periodically

to help employees maintain their purchasing power. This can be achieved through escalator clauses found in various labor agreements. These clauses provide for quarterly cost-of-living adjustments (COLA) in wages based on changes in the consumer price index (CPI).

Society • Remuneration paid to employees has social implications. The

supreme court has been keeping social and ethical consideration in adjudicating wage and salary disputes.

Economy of Country• The economy of the country has huge effect on the

remuneration decisions and can alter the compensation decisions.

Internal Factors

Employer’s Ability to Pay

Worth of a Job (Job evaluation)

Employer’s Compensation Policy

Employee’s Relative Worth

CONCEPT OF DIFFERENT WAGES

Minimum wage

Fair wage

Living wage

WAGES: An economic compensation met by the employer under some contract to his employees for services rendered by them.

MINIMUM WAGES• Minimum wages (Revision every 5 years):

• 3 consumption units for 1 earner• Minimum food requirements of 2700 calories per average Indian

adult• Clothing requirement of 72 yards per annum per family• Rent corresponding to minimum area provided for under

Government’s Industrial Housing Scheme• Fuel, lighting, etc expenditures that constitute to 20% of the total

minimum wages• Children education, medical requirement, minimum recreation,

etc that constitutes to 25% of the total minimum wage• Local conditions and other factors affecting wages

• Living Wage• More than the minimum wage• Considers national income• Paying capacity of industrial sector

• Fair wage• Above minimum wage (lower-limit) and below living

wage (upper-limit)• Factors: labour productivity prevailing wage rate, level

of national income and its distribution and capacity of industry to pay

LIVING AND FAIR WAGE

Wage Incentive PlansA system which provides additional pay (or bonus) for qualitative and quantitative performance which exceeds standard or normal levels

Relationsh-ip

building

Increasing productivity

Employee morale

Employee motivation

Employee regularity

Cost control

Improvement in quality of life

BASIC WAGE PLANSTime-Rate

SystemPiece-Rate

System• Most common method

• Time-based wages

• Mostly for general roles (administration, maintenance, etc)

• Tendency to creep upwards (inflation, promotion, etc)

• Easier from an employee’s perspective

• Payment by results system

• Output-related payment

• Encourages effort at the cost of quality

• Home-based workers, sub-contractors

• Working hours are unaccountable

• Earnings mostly below average

TOTAL WAGE =

TIME TAKEN *

RATE

TOTAL WAGE =

UNIT PRODUCED * RATE PER

UNIT

• Skill Based Pay : Employees are compensated for their job-related skills. Freshers are recruited at below market rate and as they gain expertise their compensation increases.

• Competence based Pay : Competency can be defined as the knowledge, skills and behaviour of an individual that contribute to worker’s performance.

• Broadbanding : As a base-pay technique, reduces the number of salary levels into broad salary bands. The bands have fixed minimum and maximum which overlap with other bands. Rs.10,000 – Rs.18,000 Rs.12,000 – Rs.20,000

WAGE THEORIESSUBSISTENCE

THEORYWAGE FUND

THEORY

MARGINAL PRODUCTIVITY

THEORY

EMPLOYMENT THEORY

EXPLOITATION THEORY

COMPETITIVE THEORY

LABOUR THEORY OF

VALUE

Job Description

Job Evaluation Job Hierarchy Pay Survey Pricing Jobs

PLANNING

Remuneration Model

Job Description • Experience • Education• Responsibility• Complicity of Duties• Supervision received • Supervision

exercised• Consequence of

error• Working condition• Mental, physical and

visual demands• Confidential data

• Gaining Acceptance• Creating Job evaluation committee• Finding jobs to be evaluated• Analyzing & Preparing job description• Selecting the method of evaluation• Classifying jobs• Installing the programs• Reviewing periodically

Job Evaluation

Pay Systems

Pay Fixation

Job Hierarchy• Points Assigned to

compensable factors.• Aggregate decides Job

worth.

Pay Survey

• Pay differentials.Pricing

Jobs

Pricing jobs

Job worth (internal)

Labour-market worth

• Establishing appropriate pay level

• Grouping different pay levels into pay grades

Wag

es o

r sal

arie

sPoint Values

Scattergram graph combining survey wage rates and points assigned

Each point represents1) Point worth2) Market determined wage rate.

Pay levels

Pay grades

• Utilizes same least squares method of regression in concept.

• Creates Job classes

• All jobs of same class receives the same salary.

• Broadbanding has come into picture.

Salary band

• Defines the extremes – minimum and maximum salaries

• Helps the org to ensure internal compensation.

• Base for job offering discriptions.

Level Position Median Salary L0 Traniee 1,40,000L1(A) Soft. Engg. 2,80,000 3,68,782L1(B) Sr. Soft. Engg. 3,30,000 5,45,598L2 Principal Engg. 5,50,000 5,89,910L3(A) Team Lead 7,20,000L3(B) Project Lead 8,10,000L4(A) Associate Manager 9,90,000L4(B) Manager 18,25,000L4( C) Sr. Manager 23,50,000

A TYPICAL SALARY BAND.

Challenges to Compensation Management

• Skill-based pay• Pay Reviews• Pay Secrecy• Comparable worth• Employee participation• Eliticism Vs. Egalitarianism• Monetary Vs Non-Monetary Rewards

Skill Based Pay• Opposite to the traditional model of Job-based pay.

• Workers paid on the basis of number of jobs they are capable of doing.

• Depends on the depth of the knowledge.

• Prime motive is to motivate the employee which in-turn results in contributing to the effectiveness of the organization.

• More flexibility ,reduced workforce and cost controls.

Pay Reviews

• Periodic reviews for pay.

• Negotiations happen at the time of pay review.

• Based on performance .

• In Govt. organizations, happens on the recommendations of Pay Commission.

Pay Secrecy• Secrecy is maintained to avoid comparisons made by employees.

• Public organization and Organized sectors disclose the wages and grades of pay.

• Family controlled organization or private enterprises maintain a pay secrecy.

Comparable worth• Equal pay for equal work(Equal remuneration Act, 1976).

• Workers in the same field, to be paid same if their merit and seniority match.

• Any bias would render the worth of it.

Employee Participation• Remuneration plan, where they exhibit a little resistance in

accepting it.

• So management comes into rule in that scenario.

• Prime motive is to involve employees in different phases of rewards system( Job evaluation etc…), except the remuneration plan where the management comes into role

• Possibility only in the cases, where a firm has already laid down some basic principles of participative management.

Eliticism Vs. EgalitarianismEgalitarianism

• When most employees get same remuneration, the Egalitarianism system prevails.

• Reduces work barriers between employees.

• More prevalent in highly competitive environments, involving risks and company expansion.

Eliticism

• Establishing different remuneration schemes.

• Prevalent among older ,well-established firms, stable market condition and limited competition.

• Results in more stable workforce.

• Employees make money by moving up through the company.

Monetary Vs Non-Monetary Rewards• Monetary in form of Variable pay, performance linked incentives.

• Non-Monetary in form of medical benefits, insurance plans etc… (Tax exempted)

• Most preferred are the non-monetary from the perspective of both employee and employer.