mod 2- compensation management.ppt

8/12/2019 Mod 2- COMPENSATION MANAGEMENT.ppt

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COMPENSATION MANAGEMENT


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COMPENSATION

Compensation is the remuneration received byan employee in return for his/her contribution tothe organization.

It is an organized practice that involves balancingthe work-employee relation by providingmonetary and non-monetary benefits toemployees.

Compensation is an integral part of humanresource management which helps in motivatingthe employees and improving organizationaleffectiveness.


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Objectives of Compensation Planning

Internal Equity

External Equity

Individual Equity

Attract talent

Retain talent

Ensure equity

New and desired behaviour

Control costs

Comply with legal rules

Ease of operation


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Need of Compensation Management

A good compensation package is important to motivate the

employees to increase the organizational productivity.

Unless compensation is provided no one will come andwork for the organization. Thus, compensation helps inrunning an organization effectively and accomplishing its

goals.

Salary is just a part of the compensation system, theemployees have other psychological and self-actualizationneeds to fulfill. Thus, compensation serves the purpose.

The most competitive compensation will help theorganization to attract and sustain the best talent. Thecompensation package should be as per industry standards.


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Evolution Of CompensationTodayscompensation systems have come from a long way. With the changing organizational structures workers

need and compensation systems have also been changing. From the bureaucratic organizations to the participative

organizations, employees have started asking for their rights and appropriate compensations. The higher education

standards and higher skills required for the jobs have made the organizations provide competitive compensations totheir employees.

Compensation strategy is derived from the business strategy. The business goals and objectives are aligned with the

HR strategies. Then the compensation committee or the concerned authority formulates the compensation strategy.

It depends on both internal and external factors as well as the life cycle of an organization.

Evolution of Strategic Compensation

Traditional Compensation Systems

In the traditional organizational structures, employees were expected to work hard and obey the bossesorders. In

return they were provided with job security, salary increments and promotions annually. The salary was determined

on the basis of the job work and the years of experience the employee is holding. Some of the organizations

provided for retirement benefits such as, pension plans, for the employees. It was assumed that humans work for

money, there was no space for other psychological and social needs of workers.


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Evolution Of CompensationChange in Compensation Systems

With the behavioral science theories and evolution of labour and tradeunions, employees started asking for their rights. Maslow brought in the

need hierarchy for the rights of the employees. He stated that employeesdo not work only for money but there are other needs too which theywant to satisfy from there job, i.e. social needs, psychological needs,safety needs, self-actualization, etc. Now the employees were beingtreated as human resource.

Their performance was being measured and appraised based on theorganizational and individual performance. Competition among employeesexisted. Employees were expected to work hard to have the job security.The compensation system was designed on the basis of job work andrelated proficiency of the employee.

Maslows Need Hierarchy


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Evolution Of Compensation Todays Modern Compensation Systems

Today the compensation systems are designed

aligned to the business goals and strategies. The

employees are expected to work and take their owndecisions. Authority is being delegated. Employees

feel secured and valued in the organization.

Organizations offer monetary and non-monetary

benefits to attract and retain the best talents in thecompetitive environment. Some of the benefits are

special allowances like mobile, companys vehicle;

House rent allowances; statutory leaves, etc.


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Factors influencing wage and salary

structure and administration

The organizations ability to pay Supply and demand of labour

The prevailing market rate

The cost of living

Living wage

Productivity

Trade unions bargaining power

Job requirements

Managerial attitudes

Psychological and sociological factors

Levels of skills available in the market


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Components of Employee Remuneration

Total compensation =

Direct + Indirect Compensation

Base Pay Incentives Benefits

Fringe benefits

P.F.

Medical care

Accident relief

Health and Group

insurance

PerquisitesCar

Club membership

Paid holidays

Furnished house

Stock option

scheme

Job contextChallenging job

Responsibilities

Growth Prospects

Supervision

Working conditions

Job sharing etc


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Types of CompensationDirect Compensation

Refers to monetary benefits offered and provided to

employees in return of the services they provide to theorganization.

The monetary benefits include basic salary, house rentallowance, conveyance, leave travel allowance, medicalreimbursements, special allowances, bonus, Pf/Gratuity,etc.

They are given at a regular interval at a definite time.

Indirect Compensation

Indirect compensation refers to non-monetary benefitsoffered and provided to employees in lieu of the servicesprovided by them to the organization.

They include Leave Policy, Overtime Policy, Car policy,Hospitalization, Insurance, Leave travel Assistance Limits,

Retirement Benefits, Holiday Homes.


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Direct Compensation Basic Salary - Salary is the amount received by the employee in lieu of the work done by

him/her for a certain period say a day, a week, a month, etc. It is the money an employee

receives from his/her employer by rendering his/her services.

House Rent Allowance - Organizations either provide accommodations to its employeeswho are from different state or country or they provide house rent allowances to its

employees. This is done to provide them social security and motivate them to work.

Conveyance - Organizations provide for cab facilities to their employees. Few organizations

also provide vehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowance - These allowances are provided to retain the best talent in theorganization. The employees are given allowances to visit any place they wish with their

families. The allowances are scaled as per the position of employee in the organization.

Medical Reimbursement - Organizations also look after the health conditions of their

employees. The employees are provided with medi-claims for them and their family

members. These medi-claims include health-insurances and treatment bills reimbursements.

Bonus - Bonus is paid to the employees during festive seasons to motivate them and providethem the social security. The bonus amount usually amounts to one months salary of the

employee.

Special Allowance - Special allowance such as overtime, mobile allowances, meals,

commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are

provided to employees to provide them social security and motivate them which improve

the organizational productivity.


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Indirect Compensation Leave Policy - It is the right of employee to get adequate number of leave while working

with the organization. The organizations provide for paid leaves such as, casual leaves,medical leaves (sick leave), and maternity leaves, statutory pay, etc.

Overtime Policy - Employees should be provided with the adequate allowances andfacilities during their overtime, if they happened to do so, such as transport facilities,overtime pay, etc.

Hospitalization - The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.

Insurance - Organizations also provide for accidental insurance and life insurance for

employees. This gives them the emotional security and they feel themselves valued in theorganization.

Leave Travel - The employees are provided with leaves and travel allowances to go forholiday with their families. Some organizations arrange for a tour for the employees of theorganization. This is usually done to make the employees stress free.

Retirement Benefits - Organizations provide for pension plans and other benefits for theiremployees which benefits them after they retire from the organization at the prescribed

age. Holiday Homes - Organizations provide for holiday homes and guest house for their

employees at different locations. These holiday homes are usually located in hill station andother most wanted holiday spots. The organizations make sure that the employees do notface any kind of difficulties during their stay in the guest house.

Flexible Timings - Organizations provide for flexible timings to the employees who cannotcome to work during normal shifts due to their personal problems and valid reasons.


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Components of Compensation System

Compensation systems are designed keeping in minds the strategic goals and

business objectives. Compensation system is designed on the basis of certainfactors after analyzing the job work and responsibilities.

J b l i


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Job analysisJob analysis is a systematic approach to defining the job role,

description, requirements, responsibilities, evaluation, etc. It

helps in finding out required level of education, skills,

knowledge, training, etc for the job position. It also depicts

the job worth i.e. measurable effectiveness of the job and

contribution of job to the organization. Thus, it effectively

contributes to setting up the compensation package for the

job position.

Importance of Job Analysis

Job analysis helps in analyzing the resources and establishing

the strategies to accomplish the business goals and strategicobjectives. It forms the basis for demand-supply analysis,

recruitments, compensation management, and training need

assessment and performance appraisal.


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Pay-Structures Once job analysis has been done organizations need to decide upon the

pay structures. Pay structure refers to the process of setting up the pay fora job in an organization. The process deals with internal and external

analysis to estimate the compensation package for a job profile. Internal

equity, External equity and Individual equity are the most popular pay

structures. Job description provides the in depth knowledge about the job

profile and its worth.

Pay structures are the strong determinant of employees value in the

organization. It helps in analyzing the employees role and status in the

organization. It provides for fair treatment to all employees. Pay structures

also include the estimation of incentives. The level of incentives also

depends on the level of job position in the organizational hierarchy.


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Pay-Structures Internal Equity

The internal equity method undertakes the job position in the

organizational hierarchy. The process aims at balancing the compensationprovided to a job profile in comparison to the compensation provided to

its senior and junior level in the hierarchy. The fairness is ensured using

job ranking, job classification, level of management, level of status and

factor comparison.


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Pay-Structures External Equity

Here the market pricing analysis is done. Organizations formulate their

compensation strategies by assessing the competitorsor industry standards.Organizations set the compensation packages of their employees aligned

with the prevailing compensation packages in the market. This entails for fair

treatment to the employees. At times organizations offer higher

compensation packages to attract and retain the best talent in their

organizations.


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Salary-Surveys Organizations have to bridge the gap between the industry standards and their

salary packages. They cannot provide compensation packages that are either less

than the industry standards or are very higher then the market rates. For the

purpose they undertake the salary survey. The Salary survey is the research doneto analyze the industry standards to set up the compensation strategy for the

organization. Organizations can either conduct the survey themselves or they can

purchase the survey reports from a reputed research organization. These reports

constitute the last 2-5 years or more compensation figures for the various

positions held by the organizations. The analysis is done on the basis of certainfactors defined in the objectives of the research.

Objectives of Salary Survey

To gather information regarding the industry standards

To know more about the market rate i.e. compensation offered by thecompetitors

To design a fair compensation system

To design and implement most competitive reward strategies

To benchmark the compensation strategies

S l S


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Salary-Surveys Types of Compensation Surveys

There are two types of compensation surveys undertaken by the organizations.

Standard Surveys

Standard surveys are undertaken by organizations on a regular basis. These

surveys are conducted annually based on the organizational objectives. These

surveys attempt to cover the same companies every year and provide the same

time of analysis. The reports are published annually by the researchorganizations. The organizations willing to formulate their compensations

strategies based on the surveys purchase the reports from the research

organization.

Custom SurveysAt times, a few organizations need to know some specific information. The

surveys which cater this need are known as custom surveys. The organizations

either higher research organizations to conduct theses surveys for them or they

themselves conduct the survey by sampling few of the competitors on their

own. These surveys do not have any time interval. They are undertaken as theneed arises. They focus on important issues usually one or two.


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Salary-Surveys

Survey Reports

The survey reports consist of the analysis and conclusion

drawn from the evaluative data based on the objectives of the

study. The reports also include the data, facts and figures to

support the analysis and conclusion. The supportive data and

annexure provided in the report form the basis for the un-

biased conclusion and validation of the analysis.


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Components of compensationBasic wages/Salaries:-

These refers to the cash component of the wage structure based on

which other elements of compensation may be structured.

It is normally a fixed amount which is subject to changes based on

annual increments or subject to periodical pay hikes.

It is structured based on the position of an individual in the organization

and differs from grades to grades.Dearness allowance:-

The payment of dearness allowance facilitates employees and workers

to face the price increase or inflation of prices of goods and services

consumed by him. The onslaught of price increase has a major bearing

on the living conditions of the labour. The increasing prices reduce the

compensation to nothing and the money's worth is coming down

based on the level of inflation.

The payment of dearness allowance, which may be a fixed percentage

on the basic wage, enables the employees to face the increasing prices.


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Components of compensationBonus:-

It can be fixed percentage on the basic wage paid annually or inproportion to the profitability.

The Government also prescribes a minimum statutory bonus for allemployees and workers.

There is also a bonus plan which compensates the Managers andemployees based on the sales revenue or Profit margin achieved.

Bonus plans can also be based on piece wages but depends upon theproductivity of labour.

Commissions:-

Commission to Managers and employees may be based on the salesrevenue or profits of the company.

It is always a fixed percentage on the target achieved. For taxation

purposes, commission is again a taxable component of compensation. The payment of commission as a component of commission is practised

heavily on target based sales. Depending upon the targets achieved,companies may pay a commission on a monthly or periodical basis.


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Components of compensationMixed plans:-

Companies may also pay employees and others a combination of pay aswell as commissions. This plan is called combination or mixed plan.

Apart from the salaries paid, the employees may be eligible for a fixedpercentage of commission upon achievement of fixed target of sales orprofits or Performance objectives.

Nowadays, most of the corporate sector is following this practice. This isalso termed as variable component of compensation.

Piece rate wages:- Piece rate wages are prevalent in the manufacturing wages. The

laborers are paid wages for each of the Quantity produced by them.The gross earnings of the labour would be equivalent to number ofgoods produced by them.

Piece rate wages improves productivity and is an absolutemeasurement of productivity to wage structure.

The fairness of compensation is totally based on the productivity andnot by other qualitative factors.


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Components of compensation

Sign on Bonuses:-

The latest trend in the compensation planning is the lump sum bonus for theincoming employee. A person who accepts the offer, is paid a lump sum as abonus.

Even though this practice is not prevelant in most of the industries, Equity research

and investment banking companies are paying this to attract the scarce talent.

Profit sharing payments:-

Profit sharing is again a novel concept nowadays. This can be paid throughpayment of cash or through ESOPS. The structuring of wages may be done in sucha way that, it attracts competitiveness and improved productivity.

Profit sharing can also be in the form of deferred compensation at the time ofretirement. At the time of retirement the employees may be paid a lump sum orretiral benefits.


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Components of compensation Fringe benefits:-

The provision of fringe benefits does not attract any explanation. These includes.,

a) Company cars

b) Paid vacations

c) Membership of social/cultural clubs

d) Entertainment tickets/allowances.

e) Discounted travel tickets.

f) Family vacation packages.

Reimbursements:-

Employees, depending upon their gradations in the organization may get reimbursements based on

the Expenses incurred and substantiated. Certain expenses are also paid based on expenses

incurred during the course of business.

In many cases, employers provides advances to the employees for incurring certain expenses that

are incurred during the course of the business.

Some examples are.,

a) Travel expenses.

b) Entertainment expenses

c) Out of pocket expenses

d) Refreshments expenses during office routine outside office premises.


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Components of compensation

Sickness benefits/pregnancy:-

The increasing social consciousness of corporate had resulted in thepayment of sickness benefit to the Employees of companies. This alsoincludes payments during pregnancy of women employees.

The expenses incurred due to injury or illness are compensated orreimbursed to the employees. In certain companies, the death of anemployee is compensated financially.

Companies are also providing supporting financial benefits to the familyof the bereaved employees. However, companies covering these costthrough appropriate insurance policies like, Medical and life insurance.

F i ti t ill h l


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Fair compensation system will help Positive impact on the efficiency and results produced by employees.

Encourage the employees to perform better and achieve the standards fixed.

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.

System should be well defined, uniform and applied to all the levels of the organization as a general system.

The system should be simple and flexible so that every employee would be able to compute his own compensation

receivable.

Easy to implement, should not result in exploitation of workers.

Raise the morale, efficiency and cooperation among the workers. It, being just and fair would provide satisfaction to

the workers.

Would help management in complying with the various labour acts.

Solves disputes between the employee union and management.

The system should follow the management principle of equal pay.

Motivates and encourages those who perform better and provides opportunities for those who wish to excel.

Sound Compensation/Reward System brings peace in the relationship of employer and employees.

It aims at creating a healthy competition among them and encourages employees to work hard and efficiently.

The system provides growth and advancement opportunities to the deserving employees.

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.

The business organization can think of expansion and growth if it has the support of skillful, talented and happy

workforce.

The sound compensation system is hallmark of organizations success and prosperity. The success and stability of

organization is measured with pay-package it provides to its employees.

P i i l f d l


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Principles of wage and salary

administration

Wage and salary plans should be flexible

Job evaluation should be done scientifically

Should be consistent with overallorganizational plans and programmes

Pays varies as per skills required

General level of wages should beproportionate with existing labour market

rates

Equal pay for equal work


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Wage Policy in India

Minimum wages

Fair wages

Living wages


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MINIMUM WAGES It is amount of remuneration, which is just sufficient to enable

an average worker to fulfill all his obligations.

It is applicable to workers across the country and is governed

by the Minimum Wages Act 1948

The law states that an employer who cannot pay the

minimum wage has no right to engage labour and

no justification to run a firm

The current minimum wage in India is Rs. 66 per day to all the

workers in scheduled employment

It is revised every 5 yrs


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FAIR WAGES

Workers performing work of equal skills,

difficulty or unpleasantness should receive equal or

fair wagesThe basis of fair wage is the minimumwage, withinthe capacity of the organization to

pay Fair wage should be related to the productivity

of the labourIt should match the prevailing rates

of wages in thesame or neighboring localitiesItshould reflect the level of national income and

itsdistribution


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LIVING WAGES

Living wages should enable themale earner

toprovide for himself and his family, not only

the bare essentials of food, clothing and

shelter, butalso a measure of frugal comfort

including:

Education for the childrenProtection against

ill-healthRequirements of essential social

needsA Measure of insurance against the

moreimportant misfortunes including old age


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Influencing factors of Remuneration

Remuneration

External Internal

Labour Market Business Strategy

Cost of Living Job evaluation & PA

Labour Unions The Employee

Govt. LegislationsSociety

Economy


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Devising a remuneration plan

Job Description

Job Evaluation

Job Hierarchy

Pay Survey

Pricing Jobs


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Challenges of remuneration

Skills-based pay

Employee participation

Comparable worth

Pay secrecy

Salary reviews

mod 2- compensation management.ppt

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