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ICFAI UNIVERSITY
DEHRADUN
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Name: Gopal Krishan

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IUD No.: 0901202792
Enrollment No.: 09BS0002792

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Course code:
Course title:
SLEC502
Human Resource Management

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Date of Submission: 24th Dec, 2009
Submitted to: Dr. S. C. Poornima

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Title of assignment:
compensation plan
Reshaping the employee

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Student Sign Faculty Sign

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SLHR502 Gopal Krishan 0901202792
Table of Contents
Introduction: .................................................................................................................................... 3
Myths about the compensation: ..................................................................................................... 3
1. Cutting down the labor rates will reduce the labor costs: ................................................. 4
2. Keeping labor costs low creates a potent and substantial competitive advantage: ......... 4
3. Individual incentives improve employee performance:.................................................... 4
4. People work primarily for money: ..................................................................................... 4
5. One compensation plan can work for all the employees: ................................................. 5
Framing a new compensation plan: ............................................................................................... 5
Group-oriented basis: .......................................................................................................... 6
Enjoyable work environment: ............................................................................................ 6
Select people who want to work not for money: ............................................................... 6
Transparent pay practices: .................................................................................................. 6
Flexible work hour’s option: .............................................................................................. 6
Sabbatical leaves: ................................................................................................................ 6
References: ...................................................................................................................................... 6
Reshaping the Employee Compensation Plan

Introduction:
In an organization, people have different preferences when it comes to their compensation
plan. But when we see different organizations, there will be similarity between some of the
employees working and dissimilarity between plans of the employee compensation of some
of those companies. If we compare the employee compensation plan of different companies
like that of Microsoft and Starbucks, we will find that Microsoft employees are highly paid
and are highly committed to work but at the same time, Starbucks employees are lesser paid
but are still equally committed to work. Putting this on a 2-dimension graph, we get 2
characteristics of the employer-employee relationship, i.e. the transactional and relational
bindings. The transactional binding talks about the amount of compensation an employee is
getting and the relational axis talks about the commitment towards the work. Going by the
same framework, the companies like that of stock trading will put its employees in the
quadrant of highly paid but less committed to work. This divide the employees into 4
different groups namely workers as commodity, hired guns, family and Cultlike.

Why groups are present in society that has same demands? Why are there differences in
preferences of compensation by employees when all employees work for compensation only?

Myths about the compensation:

When we observe the patterns of employee compensation in different organization and within
the organization, we find that there are a lot of misconceptions about the employee
compensation. For example, it is said that people work for pay they get. If this is true,
companies like SAS and Starbucks would have never made such a tremendous growth in the
industry. That implies that there is something more for which people work other than salary.

Major myths about the compensation are:

1. Cutting down the labor rates will reduce the labor costs: This is not true
at all because the cost of labor can be lowered not by reducing the labor cost but by
increasing the productivity of labors. There is a need to differentiate between labor
rate and cost. Labor cost is found by dividing the total labor charges with the number
of units produced. Thus if we increase the production, the labor cost per unit will be
lowered.
2. Keeping labor costs low creates a potent and substantial competitive
advantage: Labor costs are just a slippery way to get a competitive advantage. It
can be copied by anyone. Therefore it actually doesn’t act as a competitive advantage.
Rather a company should make its competitive advantage through the quality, service
and customer care.
3. Individual incentives improve employee performance: this is again a
major myth in the corporate world and many a companies fall a prey to this. If we talk
about individual incentive plans, which means that every employee wants his
colleagues to work his worst so that he gets the maximum bonus. It will be like if you
get the maximum bonus there will be the least left for the other employees. An
employee can never work in such a scenario properly and if an employee is working
only for money and the incentive, he will also leave the organization for money. It
will be like the Newton’s first law of motion that an employee will never work until
he is given a stroke of salary and money to work.
It has been rightly quoted by a consultancy firm, William M. Mercer, that most merit
pay systems share 2 attributes: they absorb vast amount of management time and they
make everybody unhappy.
Companies like SAS and south west airlines have never practiced any incentive wage
payment system though they were competing with the software companies which are
highly price volatile and the airlines being the low cost airlines, even then they are the
leaders in their segment. That is because they hire people who want to work for the
organization and not for money.
The incentive wage payment system actually creates a lot of differences among the
employees and everybody wants other to perform his worst so that he gets a major
chunk of the budgeted incentives.
Another research said that people who practice the merit wage payment system affect
the quality and management will spend a lot of time and money in resolving the
conflicts arising because of the system in function.
4. People work primarily for money: If this were true, companies like Men’s
Warehouse would never be able to succeed. Because they do not pay a good salary
rather they treat their employees as family members of the organization. Companies
like Wal-mart, tandem computers always accompany their low wages strategy with
the employee welfare plans and they treat them as members of the organization
through which the employee satisfaction is highest as compared to other firms. Such
companies never hire people who want to work for the pay they get but they actually
work for self learning and because of the environment they get to work in the
organization. The director of corporate industrial relations of Xerox, Bill Straus said
 that if the management uses compensation as the only lever to make people work,
they will end up spending a lot of money and nothing will happen with that.
5. One compensation plan can work for all the employees: This is a recent
finding by Harvard Business Review about the generations working in the corporate
world today. As per a survey conducted by 50 multinational companies, they have
found a pattern of needs in the different generations of people on jobs.
a. There are 3 generations on the pay roll of the organizations as to yet and these
are the boomers, generation X and generation Y.
b. Boomers are at present at the highest posts in the organization and generation
Y are just entering the corporate world. They are still learning about the
organizations. But on the contrary the Generation X people lies at the middle
level in the hierarchy.
c. There are similarity in the needs of the generation Y and the boomers. But the
generation X has its own different demands. Gen Y and boomers look at the
flexible working hours, remixed rewards, opportunity to work for the society
regardless of the rewards they get, they want to explore passion and hobbies,
sabbatical leaves etc. but the generation X wants to get paid for everything and
they are sincere for work. They’ll always be present for everything in the
office.
d. The reason for the differences is that, generation Y and boomers have some
similar characters like they need not worry about a family. Boomers have their
children well settled somewhere or the other and generation Y just have
started with their lives. But generation X has its own needs because they have
a family to take care of and sons of age of going to school perhaps. This
makes the differences of needs of different people.

A person, who is having a family to take care of, will always ask for money in return of
everything whether it be paid leaves or any other employee benefit program because this is
what is driving him to work. Therefore, a single plan which can work for everyone and can
contribute to maximum employee satisfaction is difficult to be framed taking all the factors
into consideration.

Framing a new compensation plan:

Taking all the above mentioned points into consideration, if a compensation plan is made, it
will be beneficial for the employees as well as the organization. Because when we actually
talk about the employee satisfaction the thing that guides are the intrinsic factors and the
extrinsic factors. The organization should look to provide the intrinsic factors as the
compensation to the employees. The intrinsic factors can vary from person to person. Some
one may have a great need for money and that can become the intrinsic factor for him but
some one may have an urge to learn and develop his skills, so that will become his intrinsic
factor. Of we talk about the generations, the generation X are mostly driven by the need for
money and other generations are driven by other factors more as compared to money.
Therefore, a balanced employee compensation plan has to be made as to give overall benefit
to everyone. Following factors can be considered while framing the plan for the employee
compensation:

Group-oriented basis: compensation can be made on a group basis and for the
overall results of the team as a whole rather than going for individual benefits. This is
because there will be peer pressure if people are working in a team and that will lead
to better results. It is also termed as group-sharing as a part of the profits arising will
be shared among the group members.
Enjoyable work environment: people enjoy working in the organization like
Infosys, Wal-mart, SAS, Tandem computers, Starbucks even though they do not get
higher salaries there but because of the work environment they get to work in. They
are satisfied with the working conditions more than the salaries they get and therefore
the commitment towards the work is also higher as we have seen in the bottom right
segment of the matrix.
Select people who want to work not for money: This is difficult to practice
in reality but if it is done the achievement of the organization will be the best.
Because the people then will not be working for money but they will work for
themselves, for their own development, they would like to give their best becau se
they love their job. It will not be like someone saying, “Because I am getting so much
of money I am working” or “I should get this much of money that is why I am
working”, but they should say, “I love my job that is why I am working”.
Transparent pay practices: Transparency has to be maintained in the
compensation because if the policies are transparent people will be satisfied as to
what they are getting and what others are getting. Everyone wants to be paid equally
with others if they are working equally as the others.
Flexible work hour’s option: Flexible working hour’s option has to be given to
those who want to practice it because it is not a need for everyone. Thus it should be
an optional benefit.
Sabbatical leaves: Sabbatical leaves are actually demanded by the generation Y
and the baby boomers in the organizations because the gen Y people wants to learn
and develop themselves more and more and similarly the boomers wants to spend
some time in other appreciable works like social service etc. But this is not the case
with the gen X people. Thus sabbatical leaves should also be made optional to the
employees.

These are some of the options as to how the compensation plan can be made effective and
can be implemented for the benefit of the organization as a whole.

References:
1. Compensation, eighth edition 2005, by George T. Milkovich and Jerry M. Newman.
Published by Tata McGraw Hills publication.
2. Harvard Business Review, Six Dangerous Myths about Pay by Jeffrey Pfeffer, May-
June 1998
3. Harvard Business Review, Why incentive plans cannot work by Alfie Kohn Sep-Oct
1993.
4. Harvard Business review, how generation Y and Baby boomers will reshape your
agenda, July-August 2009 by Sylvia Ann Hewlett, Laura Sherbin and Karen
Sumberg.