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COMPENSATION MANAGEMENT

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COMPENSATION MANAGEMENT
v

Compensation is what employees receive in exchange for their contribution to the organization.(Compensation in other terms also called as Employee Remuneration)

Employee point of view Employer point of view

Remuneration occupies an important place in the life of an employee. qHis or her standard of living, qstatus in the society, qmotivation, loyalty, and productivity depend upon the remuneration he or she receives.
For the employer too, employee remuneration is significant because of its contribution to the cost of production

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Concept of compensation
Compensation is what employees receive in exchange for their contribution to the organization. It consist of : 1. Base pay: consist of wage and salary. 2. Variable pay: linked directly to performance and consist of bonus, incentives 3. Benefits: indirect rewards given to employees such as health insurance, paid vacation, retirement, pension etc.

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Concept of wages
The amount paid by the employer for the service of hourly, daily, weekly, fortnightly employees. Compensation an employee receives for a fair days work Any economic compensation paid by the employer under some contract to his workers for the services rendered by them.

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MINIMUM WAGE
It is the base wage that an employee has to be paid to fulfill his basic needs and provide basic amenities for his family. It should be paid to every worker irrespective of the capacity of the industry to pay.

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FAIR WAGE
q

It is that wage which is above the minimum wage but below the living wage The lower limit of the fair wage is the minimum wage but the upper limit is set by the capacity of the industry to pay. The concept of fair wage is essentially linked with the

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Living wage
According to the committee on fair wages, the living wage is the highest amongst the three.

It must provide: A. Basic amenities of life B. Satisfy social needs of workers such as medical, education , retirement etc.

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Difference between wage and salary

Wage
It is fixed

Salary
It is negotiable

It may refer to the payment made It may refer to the payment made to workers. to managerial and supervisory levels. Wages have provision for overtime No such provision for salaried employees No long term guarantee for employment Implicit assumption in salary is that job can last for a long time.

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Objectives of compensation planning

S. No. Objectives of compensation planning 1 2 3 4 Attract and Retain talent Ensure equity Control costs and Ease of operation Reward appropriately(loyalty, commitment, experience, risk raking and other desired behaviors) Comply with legal rules

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FACTORS INFLUENCING EMPLOYEE COMPENSATION

EXTERNAL FACTORS
1) 2) 3) 4) 5) 6) 7)

INTERNAL FACTORS
1) 2)

Labor Market Cost of living Labor unions Labor laws Society The Economy Compensation Survey

3)

4)

Compensation policies The Organizational ability to pay Job analysis and job description The Employee

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EXTERNAL FACTORS
1. Labor market: A labour market is defined as a pool of all potential workers who compete for jobs. It also includes the employers who compete for workers. Labor markets are based on the supply and demand of labor in a country or a specific location that are able and willing to work.

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2.Cost of living:
DA (Dearness allowance) takes care of the price inflation that affects the purchasing power of the employees. It is a regular and continuing part of the compensation package that gets changed according to the price increase. For the employees of PSUs, Governments through the Wage Board and/or the Pay Commissions fix this component periodically based on the CPI (Consumer Price Index) to satisfy the real values

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3.Labour Unions:
The presence or absence of labour organization often determine the quantum of wages paid to employees. The benefit of belonging to a labor union is that wages are always the union's top priority. Union leaders work hard to ensure members receive sufficient wages for the work performed.

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4. LABOUR LAWS
Government makes and enacts laws regarding welfare aspects of workers, their security and their prosperity.

Workers Compensation Act,1923 The Payment Of Wages Act, 1936 The Minimum Wages Act, 1948 Employees State Insurance Act, 1948 Employees Provident Fund Act, 1952 The Payment To Bonus Act, 1965 Maternity Benefit Act, 1971

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5.Compensation survey
Collection

of salary and market data. It includes average salaries, inflation indicators, cost of living indicators and salary budget averages.

INTERNAL FACTORS INFLUENCING EMPLOYEE COMPENSATION

Compensation

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Policies: Provides general guidelines for making compensation decisions. per the organizations ability to pay

As

INTERNAL FACTORS INFLUENCING EMPLOYEE COMPENSATION

Job

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analysis and job description: more difficult and challenging a job, the higher the wages.

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INTERNAL FACTORS INFLUENCING EMPLOYEE COMPENSATION

The

employee: Performance, seniority, experience, potential and even luck determine his or her remuneration.

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Functions of wage & salary Administration

To recommend changes in wage policies and in the salary or wage level. To review wage and salary department wise. To check all activities of the salary administration against the company policies.

Principles of wage & salary Administration

Wage policies should be carefully developed, having in mind the interest of : (a) the owners (b) the employees (c) the consumers (d) the community

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It should be clearly expressed in writing. It should be checked against the formulated policies

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It must inform to the employees in right way. It should be evaluated from time to time. Departmental performance should be checked periodically against the standards set in advance Job descriptions and performance rating should e checked periodically to keep them up to date

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Problems in Wages and Salary Administration

High pressure from employees unions for increasing the remuneration. High pressure from management to reduce cost.

Methods of Wage Payment

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Time Wage System

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This is the oldest system of remunerating labour. Under this method employee is paid on the basis of time worked i.e. at hourly, weekly or monthly rate, irrespective of the quantity of work done.

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Advantages Simplicity Security Maintenance of quality Union support Convenient

Disadvantages Lack of incentives Lack of distinction Close supervision Expensive

Piece Wage System

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Wages can be defined as, "a sum of money paid to the staff by the employer for rendering services as per a contract. Piece rate is used for jobs in which the quantity of work done by a person or a group is readily counted or calculated.

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Advantages Motivating Higher productivity Less supervision Society benefits Opportunities for talented and Sincere employees

Disadvantages Insecurity Higher cost of production Accidents More paper work Poor quality

Fringe Benefit
Compensation in addition to direct wages or salaries, such as company car, house allowance, medical insurance, paid holidays, pension schemes, subsidized meals. Some fringe benefits are regarded part of a taxable income.

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Objectives of Fringe Benefits

Attracting and retaining talent. Negotiation tool. Promote organizational image. Satisfy employee needs. Increase satisfaction and morale.

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Types Of Fringe Benefits

Pension Schemes. Personal security. Financial assistance. Personal needs. Company cars and petrol. Other benefits. Intangible benefits

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Choices in designing a compensation system

1.

Internal v. external pay:-

Internal pay External pay Compensation policies Firm pay wages that are are internally equitable equal to what other when employees believe firms are paying for the that wage rates of their similar type of work. jobs approximate the job worth of the org. Wage rates = job worth Firm pay wages = other firms rate for similar work

2. Fixed v. variable pay:Fixed pay Wages and salary Variable pay Benefits

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VP is proportional Indirect rewards to performance Bonus Incentives Allowances Insurance Paid vacation Retirement Pension Flexible timings

3. Performance v membership:Performance based Membership based Knowledge based organizations Most of the organizations now a days follow performance however still pay their based payment plan offering award employees based on no. to employees for:of hours or work. qCost saving suggestions
q

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Bonuses for perfect attendance

Merit pay based on supervisory appraisals

q

Suggestion for product development qHandsome bonus for final result

q

Guidelines for effective performance based plans: Establish

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high standards for performance so that only the truly outstanding employee emerge as a winners accurate performance appraisal

Develop

systems

Tie

rewards closely to performance pay increases meaningful

Make

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4. Job v individual pay

Job pay qAdopted by most traditional organizations
q

Individual pay qKnowledge based pay systems

Decide the max and min qEmployees are paid on values of each job the basis of the jobs they can handle or talents they qIgnoring the abilities and have potential of employees Compel capable workers to leave the organization.
q

5.Below market and above market system:

Below market
q

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Above market

Young and new workers qHLL,TCS,INFOSYS Higher compensation in order to attract the cream of the crop
q

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Open v secret pay

Open pay
q

Secret pay

Eliminates the doubts in qEmployee dont know the minds of employees how much others are getting qEquity and fairness qSecrecy also serves to qTrust and commitment cover-up inequalities prevailing within the qManagers can defend internal pay structure. their compensation publically.