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CHAPTER : 03

COMPENSATION MANAGEMENT

OBJECTIVES OF THE CHAPTER


To understand.. Concept and elements of compensation Motivation, loyalty and commitment to job. Job Evaluation-Process, techniques, advantages and limitations Concept of wage and salary administration Executive compensation Employee benefits Recent trends in compensation

Compensation: An Overview
Compensation - Total of all rewards provided to employees in return for services Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions Indirect financial compensation - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction a person receives from job itself or from work environment

Equity in Financial Compensation


Equity Theory: Balance between inputs brought by employees and output received by them Equity - Fair pay treatment for employees External equity Comparable salary for work performed by workers of similar jobs in other firms. Internal equity - pay according to relative value of other jobs within same organization Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority Team equity - More productive teams are rewarded more than less productive groups.

Determinants Compensation
Organization Labor market Job Employee

Organization
Compensation Policies
Pay leaders Pay higher wages and salaries Market rate-, or going rate :Pay what most employers pay for same job Pay followers pay below market rate because poor financial condition or believe they do not require

highly capable employees

Ability to Pay Organizations assessment of its ability to pay is important factor in determining pay levels. Profit levels, asset levels, consistency Salary as percentage of total expenses

The Labor Market


Determinant of Financial Compensation Cost of living Labor unions Society Economy Legislation Informal and formal Compensation surveys can lead to understanding the labor market

GDP and Workforce Distribution


1983
% GDP Agricul ture Industr y Service s 40.0 24.3 35.7 % Workfor ce 68.5 13.8 17.6 % GDP 30.0 25.2 48.8

1993-94
% Workforc e 64.0 14.9 21.1

2004-05
% GDP 20.2 26.1 53.7 % Workfor ce 56.5 18.8 24.8

October 2, 2007

UN Meeting

THE JOB
Definition And Objectives of Job Evaluation: Job evaluation is the systematic process of analyzing and evaluating jobs to determine the relative worth of each job in an organization. Objectives:
To determine the position and place of a job To clarify responsibility and authority To ensure satisfaction in compensation To avoid discrimination in compensation

PROCESS OF JOB EVALUATION


Preparation of Job Evaluation Plan Job Analysis Job Description and Job Specification Selection of job dimensions Classification of jobs Implementation of the evaluation Determine the pay

TECHNIQUES OF JOB EVALUATION


Types of Job Evaluation Methods

Quantitative

Non-Quantitative

Point Rating Method

Factor Comparison Method

Ranking Method

Job Classification or Job Grading Method

ADVANTAGES OF JOB EVALUATION


Helps prevent and remove discrepancies in the wage structure Facilitates the entry of new jobs into the organizational wage structure Helps in comparing the organization's wage structure with that of the competitor's Information obtained can be used for selection, transfers and promotions

CONCEPT OF WAGE AND SALARY ADMINISTRATION


Base wage and salaries are defined as the hourly, weekly and monthly pay that employees receive for their work in the organization.
Purpose of wage & salary administration
Attracting talented resources Retaining and motivating employees Financial management Legal requirements

CONCEPTS OF DIFFERENT WAGES


Minimum wage
It is the amount of remuneration, which is just sufficient to enable an average worker to fulfill all his obligations.

Fair wage
Fair wages are higher than minimum wage level and is related to the productivity of the labor.

Living wage
Living wages enables the male earner to provided for himself and his family.

BASIC WAGE PLANS


Time wage plan
Employees are paid for the period of time for which they have been employed.

Piece wage plan


Workers are paid for the work done.

Skill-based plan
Employees are paid for the job-related skills

Competency-based pay
Competencies of the best performing employee are identified and is paid for the competencies. Other employees are paid based on these competencies.

Broad banding
It reduces the number of salary levels into broad salary bands. The bands have a fixed minimum and maximum that overlaps with other bands.

VARIABLE AND EXECUTIVE COMPENSATION

In variable compensation, employees are paid in accordance with their performance and not in accordance with their position in the organizational hierarchy.
Executive compensation is paid to the CEO or the top executives of an organization.

CONCEPT OF REWARDS
Organizational rewards are those that the employees earn as a result of his/her employment with the organization.
Types of Rewards

Extrinsic Rewards Ex: promotion, bonus

Intrinsic Rewards Ex: challenging assignment

Types of Incentive Plans

Short-Term Plans

Long-Term Plans

Hasley Rowan Plan Plan

Barth Task System of Bonus Wages System

Point Rating System

Progressive Bonus

Employee Stock Plans

Gainsharing

Profitsharing

Annual Bonus

Combination Deferred Plan Plan

Distribution Plan

Non-monetary incentives
Recognition Challenging assignments Additional responsibility Rewarding

Employee benefits
Free or subsidized lunches Medical facilities Paid holiday / vacation PF and gratuity Employee insurance Maternity leave Child-care centres Educational allowances Company accommodation Tax assistance

OBJECTIVES OF EMPLOYEE BENEFITS

To match growing cost of living To reward employees for their employment with the organization To satisfy the union's demands To attract and retain talent

HISTORY AND EVOLUTION OF BENEFIT PROGRAMS


The Ahmedabad-based Calico Mills started the concept of medical services in 1915 Tatas started a medical unit for their employees in 1918 Delhi Cloth Mills (DCM) started welfare schemes in 1920 The payment of Gratuity Act (1972) The Payment of Bonus Act (1965) The Factories Act (1948)

MODERN CONCEPTS IN EMPLOYEE BENEFIT SCHEMES Golden Parachute:


It is a provision in the employment contracts of the top management, which ensures the provision of compensation or lucrative benefits for the loss of job due to change of control.

Cafeteria benefit plan:


Here, the management customizes the benefit programs after assessing employee preferences and needs.

CASES AND EXERCISES

Case :1 Parity Is it Fair or Unfair?

HR FOCUS

HR Focus : Wipro Technologies Limited

FOCAL POINTS OF THE CHAPTER

Definition and objectives of Job Evaluation Process, techniques, advantages and limitations Concept of wage and salary administration Basic wage plans Employee benefits Objectives, history and evolution of employee benefits