Master of Business Administration – MBA Semester 4

SMU
MU006 – Compensation Benefits
Assignments

Submitted by : Tabassum Attar

Reg No :
 SET-1

Q-1: Explain the objective of a sound compensation planning.

Ans: The most important objective of any pay system is fairness or equity. The team
equity has three dimension:
a) Internal equity: This ensures that more difficult jobs are paid more.
b) External equity: This ensures that jobs are fairly compensated in comparison to
similar jobs in the labour market.
c) Individual equity: It ensures equal pay for equal work, i.e. each individual’s pay is
fair in comparison to others doing the same jobs.

In addition, there are other objectives as well. The ultimate goal of compensation
administration (the process of managing a company’s compentation program) is to
reward desired behaviours and encourage people to do well in there jobs. Some of the
important objectives that are sought to be achieved through effective compensation
management are listed below:

a) Attract Talent: compensation needs to be high enough to attract talented people.

Since many firms copete to hire the services of competent people, the salaries
offered must be high enough to motivate them to apply.
b) Retain Talent: If compensation levels fall below the expectations of employees or
are not competitive, employees may quit in frustration.
c) Ensure Equity: Pay should equal the worth of a job. Similar jobs should get
similar pay. Like wise, more qualified people should get better wages.
d) New and Desired Behaviour: pay should reward loyalty, commitment, experience,
risk-taking, initiative and other desired behaviours. Where the company fails to
reward such behaviour, employee may go in search of greener pastures outside.
e) Control costs: The cost of hiring people should not be too high. Effective
compensation management ensures that workers are neither overpaid nor
underpaid.
f) Comply with legal rules: Compensation programs must invariably satisfy
governmental rules regarding minimum wages, bonus, allowances, benefits, etc.
g) Ease of operation: The compensation management system should be easy to
understand and operate. Then only will it promote understanding regarding pay
related matters between employees, unions and managers.

Q-2: Apex is an ITES service provider Company. It is startup (new) company,

which is trying to woo talent from the market. Being a new company it might face
difficulty in hiring highly talented candidates. As remuneration plays an important
role, what will be the strategic incentives plans organization can offer to persuade
talented employees besides providing good salary?

Ans:

Q-3: Explain the steps involved in designing a Remuneration Plan.

Ans: Designing a remuneration plan involves the followings:

1. Job Analysis: The main purpose of conducting job analysis is to prepare job
description and job specification which in turn helps to hire the right quality of workforce
into the organization.

It helps to understand the qualities needed by employees,defined through behavioral

descriptors, to provide optimum work performance.

It obtains answers to such questions such as: 1. Why does job exists? 2. What physical
and mental activities does the worker undertake? 3. When is the job to be performed? 4.
Where is the job to be performed? 5. How does the worker do the job? 6. What
qualifications are needed to perform the job? 7. What are the working conditions (such as
levels of temperature, noise, offensive fumes, light) 8. What machinery or equipment is
used in the job? 9. What constitutes successful performance?

There are several ways to conduct a job analysis, including: interviews with incumbents
and supervisors, questionnaires (structured, open-ended, or both), observation, critical
incident investigations, and gathering background information such as duty statements or
classification specifications. In job analysis conducted by HR professionals, it is common
to use more than one of these methods.

2. Job Documentation: To evaluate job content, it provide objective criteria for making
pay comparison, ensure that jobs are classified according to content as opposed to
individual personalities, effectively communicate the job duties to both supervisor and
employees and help the organization defend it self against charges and discrimination.

3. Development of a job worth hierarchy: It is a result of job evaluation. There are six
major methods which are divided in two groups according to their nature.

a) Whole job evaluation and are non-quantitative in nature

i- Ranking
ii- Classification
iii- Slotting

b) Factor evaluation and are quantitative in nature

i- Point factor
ii- Factor comparison
iii- Scored questionnaires

4. Pay survey: Wages and salary surveys ensure external equity. A wage and salary
survey provides information as to what other organizations that compete for employees
are paying. The survey could cover all jobs within an organization or limited to
benchmark jobs.
The benchmark jobs have the following basic characteristics
 i- Many workers in other companies have these jobs.
ii- They will not be changing in the immediate future in terms of tasks,
responsibilities etc.
iii- They represent the full range in term of salary such that some are among the
lowest paid in the group of jobs, others are in the middle range and some are
at the high end of the pay scale.

Formal and informal surveys could be undertaken to collect data on benefits like
insurance, medical leave, vacation pay etc. and offer a basis on which to take decision
regarding employee benefits. Published sources also provide valuable
information.Published sources also provide valuable information regarding industry-wise
trends in salary structures in and around the country.
The published sources in India include:

i. Reports published by the Ministry of Labour

ii. Pay Commission Reports
iii. Reports of wage Bonds appointed by Government
iv. Reports of employee and employer’s organization
v. Trade journals of specific Industry

5. Pricing the Job: Establishment of pay Ranges:

In order to actually establish a pay structure, an organization needs to set rates of pay for
the jobs in the job hierarchy. This will depend on the number of different levels of
relative job value that are recognized by the organization and the difference in pay
between the highest and lowest paid jobs in the pay structure. The focal point pf the pay
range is the midpoint, an organization can determine the range minimum and maximum.

6. Pay rates and Pay Increases: This means deciding how to pay new employees, how
and when to give employee increases, including how to move existing employees from
minimum to maximum of their assigned pay grades, how to determine the pay increase
for an employee being promoted from one job to another and what influence, if any, cost
of labour increases will have on the determination of pay increases for employees.

7. Starting pay for new Employees: In order to avoid paying new employees the same as
more experienced employees, most employers choose to start new employees closer to
the minimum of the pay range. In general, an employee with minimum qualifications
should be paid the minimum of the range. This general rule is not true when a new hire
has skills which are in great demand or has skills or other expertise substantially above
the minimum.

8. Employee Increases: There are several different types of base pay increases: General
(across the board) increases, cost of living/ labour increases, promotion increases, step
increases (based on longevity) and merit increases.
9. Performance appraisal: A performance appraisal, employee appraisal, performance
review, or (career) development discussion[1] is a method by which the job performance
of an employee is evaluated (generally in terms of quality, quantity, cost, and time)
typically by the corresponding manager or supervisor[2]. A performance appraisal is a part
of guiding and managing career development. It is the process of obtaining, analyzing,
and recording information about the relative worth of an employee to the organization.
Performance appraisal is an analysis of an employee's recent successes and failures,
personal strengths and weaknesses, and suitability for promotion or further training. It is
also the judgement of an employee's performance in a job based on considerations other
than productivity alone.

10. Maintaining and Auditing a Compensation plan: Changes in the external market or
internally within the organization can cause one or more parts of a compensation plan to
become outdated. Part of the challenge in creating a compensation plan is to build in
mechanisms that facilitate change when necessary, yet maintain control on a regular
basis. Some actions an organization can take to maintain an updated compensation plan
include regular review of job descriptions, monitoring of compensation levels versus
companies with which there is competition for employees, and regular review of the pay
structure including pay ranges and pay increase budgets. An audit is an excellent means
to ensure that a compensation plan is being properly administered and maintained.

When planning to audit a compensation plan, an organization needs to consider the

following:
Process measures - Are procedures and practices in place to ensure the compensation
plan is being administered smoothly and efficiently?

Policy compliance - Are there procedures or other mechanisms in place to ensure that the
compensation plan is being administered in accordance with policy?

Documentation adequacy - Is there adequate documentation in place to ensure that the

administration of the compensation plan and compliance issues can be audited?

Overall results - Are there measures that can assess how well the compensation plan is
achieving its goals and objectives?

After reviewing audit results, management can make recommendations on any

improvements that may be necessary, allocate the necessary resources and follow-up to
make sure the work is completed.
 SET-2

Q.1. Fringe benefits are the important components of remuneration, though most of the
organizations face confusion when it comes to administering fringe benefits program.
Design the steps needed to administer Fringe benefits to avoid problem in administering
indirect remuneration plan.

Ans: A fringe benefit is a form of pay (including property, services, cash or cash
equivalent) in addition to stated play for the performance of services. Some forms of
additional compensation are specifically designated as “fringe benefits” in the Internal
Revenue Code; others, such as moving expenses or awards, have statutory provisions
providing for special tax treatment but are not so designated by the Code. This
publication uses the term broadly to refer to all remuneration other than stated pay for
which special tax treatment is available. The definition of fringe benefits applies to
services of employees and independent contractors; however, unless otherwise indicated,
this guide applies to fringe benefits provided by an employer to an employee. (For a
discussion of whether a worker is an employee or independent contractor, see Publication
15-A.) Fringe benefits for employees are taxable wages unless specifically excluded by a
section of the Internal Revenue Code (IRC).

Fringe benefits are one of the means to ensure, maintain and increase the material
welfare of employees. The physical and mental strain of workers in an industry is
considerably alleviated by tax benefits through creating an environment that insulates
them from fatigue and monotony.

Administration of Fringe Benefits:

Administration of Fringe Benefits Tax identified that a number of processes relating to

the administration of FBT in Australian Government entities could be improved. This
Guide has been produced to assist entities to administer their FBT obligations.

These problem can be avoided if the following lines are taken while administering
indirect remuneration. The steps are:

1.Benifit objectives:

In establishing objectives, the management must consider several factors like employee
preference for benefits, attendance, length of service, performance etc. The benefits
accomplish four objectives;

1. Fostering external competitiveness,

2. Increasing cost effectiveness,
3. Meeting Individual employee’s needs and preferences,
4. Complying with legal compulsions.

2. Assessing Environment:
A company remuneration program is influenced by both external and internal factor.

External Factor:
The external factors are aspects such as govt. policy and regulations, Unions, and
economic factors. The major govt. policies, which influence employee benefits and
services, are wage regulations, tax policies, and specific benefits laws.

Unions are a dominant force to improve benefits and services.

Economic factors influence benefits decisions in competitive way. Struggling to achieve
competitive prices for their product and service, managers look to reduce, at least curtail,
increases in labour cost.

Competition in the labour market to attract and retain production employees creates
pressure to match the benefits offered by others.

Internal factors:
Internal factors involve organisational strategies and objectives, employee preferences
and demographics.
The preferences and demographics of a particular employee in an organisation also affect
indirect remuneration.

3. Competitiveness:
Generally organisations offer benefits to match or outstrip those offered by competitors.
These are assessed through market surveys conducted by professional associations and
consultants. These survey provide data on the various benefits offered, their coverage,
eligibility and costs.

4.Communicating the benefits:

Fringe benefits program must be communicated to employees through booklets,
brochures, slide presentations, and regular employee meetings. An effective technique is
to use employee calendar, which communicates the total remuneration components.

5.Evaluation and control:

One way to assessing the usefulness of fringes is to ascertain how far the advantages
claimed in favour of indirect monetary schemes have really benefited the employees. The
aspect that need to be looked into are;
a. Have the earning of the employee improved?
b. Have the benefits been able to attract and retain competent people?
c. Has the morale of employees gone up?
d. Have industrial relations improved?