Compensation and Benefits

Contents:
Meaning and significance of compensation
and benefits, Basic Salary, allowances,
incentives, perks and benefits. Structured
Pay scales of the Government Sector and
Cost to company approach of the private
consultant. Statutory aspects of
compensation and benefits
Meaning & Definition of Compensation:
According to Cascio, Compensation includes
direct cash payments, indirect payments in the
form of employee benefits, and incentives to
motivate employee to strive for higher levels of
productivity.
According to R. Wayne Mondy, Compensation
is the total of all rewards provided to employees
in return for their services. The overall purposes
of providing compensation are to attract, retain
and motivate employees.
Essential features of compensation:
Availability, Timeliness, Performance related, Durability,
Equity, Visibility, Flexibility, Cost effective.

Effort Performance Organizational Goals Individual Goals
Rewards
Rewards
Intrinsic Extrinsic
Participate in
decision making

Job freedom

More responsibility

More interesting
work

Personal growth
opportunities

Diversity of
activities
Financial
Non-financial
Performance
based
Membership
based
Piece work

Commission

Incentive Pay

Performance
bonus

Merit pay plans
Basic Pay

DA

HRA

Protection programmes

Pay for time not
worked
Flexible work
schedules

Leave

Assistants

Impressive job
titles

Conveyance

Medical Care
4
SIGNIFICANCE OF COMPENSATION:

1) To acquire qualified and competent personnel.

2) Retain the present employees.

3) Secure internal and external equity.

4) Ensure desired behaviour.

5) To keep labour and administrative costs in line with the ability of the
organization to pay.

6) To protect the public as progressive employers and comply with wage
legislations.

7) To pay according to content and difficulty of job and in tune with the effort
and merit of the employees.

8) Simplify collective bargaining procedures and negotiations.

9) Organizational effectiveness.
5
COMPONENTS OF COMPENSATION:
Components of Compensation
Basic Salary
Incentives
Bonus
Perks or Benefits
Allowances
6
Pay scale concept
Major components of salary in pay scale concept
Basic pay: Fundamental component of compensation based on which most of the
allowances, incentives, benefits etc are determined.
Dearness allowance: Part of the compensation which is paid to overcome the
livelihood hardship arising out of increase in the cost of living. It gets reduced if cost
of living comes down and gets increased if cost of living goes up.
House rent allowance: Part of the compensation which is paid to meet the cost of
housing accommodation.
Conveyance Allowance: Part of the compensation which is paid to meet the cost of
travelling for official work.
Medical allowance: Part of the compensation which is paid to meet the cost of
medical treatment.
There are several other allowances which vary from one organization to another.
Example of a (monthly) pay scale in Indian rupees
10000-500-15000-1000-20000-1500-29000(pay scale is basic pay component. In
this example the employee starts at a basic pay of Rs.10000 and earns annual
increment of Rs.500 per year for ten years and thereafter Rs.1000 per year for next
five years, Rs.1500 per year for another six years and stops earning increments
since the pay scale ends.
This concept is popularly prevalent in public sector and government departments in
India.
How to read salary pay scale : Rs.10000-470/6-12820-
500/3-143 ? What would be my total salary?
in one of the banks recruitment advertisement the details
about salary are mentioned as below for probationary officer:
"officer will drawn salary in the scale of Rs.10000-470/6-
12820-500/3-14320-560/7-1 applicable to Junior
Management Grade Scale-I. They will also be eligible for DA,
HRA, & CCA as per rules in force from time to time. At
present, initial monthly emoluments of Junior Management
Grade Scale I Officers, including DA, HRA, CCA, are
approximately Rs. 18000/- in a Metropolitan Centre. (The
scale of pay is under revision.) " How to read salary pay scale :
Rs.10000-470/6-12820-500/3-14320-560/7-1 ? What would
be my total salary?


The pay scale : Rs.10000-470/6-12820-500/3-14320-
560/7-1 says that when you join the job your initial basic
salary would be 10000 Rs. and HRA, DA are additional.

Now the next string 470/6 tells that you will get an
increment of Rs 470 in your basic salary after six months.
And it would reach to a maximum of Rs. 12820.

And so on for 500/3 and further..........



Cost to the company (CTC) concept
Total cost to be incurred to have a person in employment is
determined first, which is called CTC.
This CTC is thereafter distributed in the form of salary,
allowances, benefits, incentives etc.
The various components of CTC can be customized to the
needs of individual employee.
Under this method it is easier to compute the cost of salary.
CTC does not vary based on increase/ or decrease in the cost
of living.
CTC is determined based on compensation levels in the job
market and the ability of an organization to pay.
CTC concept is very popular in private sector.

Basic components of managerial remuneration
Basic/ base salary: fixed compensation paid regularly with
periodical increase say once in a year regardless of the rate of
growth of the business
Short term incentives: cash paid/ company paid trips and picnics
for achieving short terms goals like achieving sales targets for the
year
Long term incentives: Stock option plans
Special executive benefits: insurance policies at company cost,
health insurance
Benefits: paid leave, health care, survivors protection, retirement
plans.
Perks : company car, housing, club membership, entertainment,
news paper, house maintenance, maid servants charges.
Factors that determine managerial compensation
Some important factors
Value of the persons work to the organization
Demand and supply gap in the job market
The nature of business
Nature of work
Place of work
Organizational policy
Prevailing rate of compensation in the industry
Knowledge and skill level of the manager

Compensating expatriate employees
Home based salary policy retaining the home
country salary structure of any manager by
attaching additional allowances for cost of living
differentials, depending upon the place of posting.
Employees from different countries working in the
same office and same work may be paid different
salaries
Host based plan: the manager gets salary
prevailing in the host country. Managers from
advanced country posted in backward countries
are at a disadvantage
There is no single best plan. It differs from case to
case and from company to company
Incentive plans
Individual incentive plans: give money over and
above base salary to individual employees who
meet specific performance standard. Example;
Spot bonus
Group incentive plans: give money over and
above bas salary to all members of the group for
meeting specific performance standard.
Profit sharing plans: provide employees with a
share of the organization's profit in a specified
period.
Gain sharing plan: reward employees for
improvements in organizational productivity
Incentive plans
Piecework plans
Straight piece work plan: each worker receives a
set payment for each piece produced or
processed in a factory/shop
Guaranteed piecework plan: the minimum hourly
wage plus an incentive for each piece produced
above a set number of pieces per hour.
Standard hour plan: the worker is rewarded by a
percent premium that equals the percent by which
his or her performance exceeds the standard

Team based incentives
METHOD 1
Set work standards for each member of the group and
maintain a count of the out put of each member.
Then pay in one of the following ways
All members receive the pay earned by the highest
producer or
All members receive the pay earned by the lowest
producer or
All members receive payment equal to the average pay
earned by the group.
Team based incentives
METHOD 2
set a performance standard based on the final
output of the group as a whole
then all member will receive the same pay based
on the rate fixed.
METHOD 3
Tie team performance to the companys strategic
goals.
Teams which achieve the goals get the stated
incentive.

Long term incentives
Stock option: the right to purchase a stated number of
share of a company stock at today's price at some time in
the future.
Stock appreciation rights: either to buy the stocks in
future as per the stock option or take any appreciation in
the stock price.
Performance achievement plans: get shares for
achieving predetermined performance targets.
Restricted stock plans: shares allotted for free or
discount but not allowed to sell immediately
Phantom stock plans: receive units not shares and in
future date they receive the appreciated value of money
on those units
Incentive plans-important points to note
Link the incentive with your business strategy
Ensure that efforts and rewards are directly
related
Make the plan understandable and easily
calculable by the employees
Set effective standards
Guarantee your standards
Guarantee base pay
Have objective measurement systems
Emphasize long term as well as short term
success
Take the market conditions into consideration
Statutory Benefits
Employees State Insurance
Provident fund
Gratuity

Factors influencing the Wages and Administration
(Determinants of compensation)
Statutory requirements
Employee unions
Policy of the organization
Ability of the organization to pay
Equity-internal and external
Demand supply gap in labour
market
Statutory requirements in India
Examples
Article 39(d) of Constitution suggests equal pay
for equal work for both men and women.
Minimum wages Act 1948
Equal remuneration Act 1976
Payment of bonus Act 1965
Payment of Wages Act 1936
Payment of overtime legal provisions
Law for ESI 1948, PF 1952, Gratuity 1972
Statutory requirements in India
Payment of bonus Act 1965 requires
employers to pay bonus to eligible
employees every year.
Beedi and Cigar Workers[conditions of
employment )Act 1966 requires
payment of overtime at double the
normal rate[s.18] and One day paid
holiday for every six days of work
Statutory requirements in India
Factories Act 1948
Sec.52 of this provides weekly holiday for
workmen.
Sec.59 provides extra wages for overtime
Industrial Employment standing orders
Act1946
Requires the employers to prescribe wage
rates and mode of payment
Prescribes subsistence allowance during
suspension
Statutory requirements in India
Section 33 of Mines Act 1952 requires
payment of overtime to workmen
Working journalists Act 1955 provides
for weekly holiday[s.6] over time [s.10]
annual holidays [s.13].
Apprentices Act 1961 requires
payment of stipend, overtime and
weekly holiday.
Statutory requirements for holidays
Weekly holidays Act 1942
Shops and commercial
establishments Acts
National and Festival Holidays Act
of the states
provide for weekly off and holidays.


Statutory requirements in India
Annual Leave with wages Examples
The Factories Act
The Mines Act
The Plantation Labour Act
The working journalists Act
The sales promotion employees Act
Beedi Cigar workers Act
Motor Transport workers Act
Shops and commercial establishments Act
Employee Unions and Compensation
The Trade Union Act 1926 allows formation of
union by employees
Unionized employees bargain collectively with
the employer for higher wages.
Unions can avail the statutory remedies like
settlements or award provided under the industrial
dispute Act to get better compensation.
Unions can boycott work demanding better
wages
Industrial employment standing orders Act
provide for certified standing orders to prescribe
service conditions

Organizational policies on compensation
Employers compensation policy influences the
determination of compensation.
Each organization has its own policy whether
they want to be seen as high paying employer or
low paying.
The other issues of compensation policy are the
difference between managerial and non
managerial salaries, apprentices salary etc.
The method of deciding increments, incentives
etc.