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compensation Management

compensation Management



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Published by RAVI PARKASH
about salary & wages
about salary & wages

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Published by: RAVI PARKASH on Dec 02, 2008
Copyright:Attribution Non-commercial


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1.1 Meaning of Compensation
Compensation management, also known as wage and salaryadministration, remuneration management, or reward management, isconcernedwith designing and implementing total compensation package. Thetraditionalconcept of wage and salary administration emphasised on onlydetermination of wage and salary structures in organisational settings. However, over thepassageof time, many more forms of compensation as discussed earlier, entered thebusiness field which necessiated to take wage and salary administration incomprehensive way with a suitable change in its nomenclature. Beach hasdefined wage and salary administration as follows:
"wage and salary administration refers to the establishment and implementation of sound policies and practices of employeecompensation. It includes such areas as job evaluational, surveys of wages and salaries, analysis of relevant organisational problems,development and maintenance of wage structure, establishing rules for administering wages. wage payments, incentives, profit sharing, wagechanges and adjustments, supplementary payments, control of compensation costs and other related items"
1.2 Concept of Compensation
 The literal meaning of compensation is to counter-balance. In the case of human resource management, compensation is referred to as money andotherbenefits received by an employee for providing services to his employer.Moneyand benefits received may be in different forms-base compensation inmoneyfonn and various benefits, which may be associated with employee's servicetothe employer like provident fund, gratuity, insurance scheme and any otherpayment which the employee receives or benefits he enjoys in lieu of suchpayment. Cascio has defined compensation as follows:
"Compensation includes direct cash payments, indirect payments in theform of employee benefits and incentives to motivate employees to strivefor higher levels of productivity” 
Based on above description of compensation, we may identify its variouscomponents as follows:
1. Wage and Salary:
Wage and salary are the most important componentof compensation and these are essential irrespectiveof the type of organisation. Wage is referred to as remuneration to workers particularly,
hourly-rated payment. Salary refers to as remuneration paid to white-collaremployees including managerial personnel. Wages and salary are paid onthe basis of fixed period of time and normally not associated withproductivity of an employee at a particular time.
2. Incentives:
Incentives are the additional payment to employees besidesthe payment of wages and salaries. Often these are linked withproductivity, either in terms of higher production or cost saving or both. These incentives may be given on individual basis or group basis.
3. Fringe Benefits:
Fringe benefits include such benefits which areprovidedto the employees either having long-term impact like provident fund,gratuity, pension; or occurrence of certain events like medical benefits,accident relief, health and life insurance; or facilitation in performance of  job like uniforms, Canteens, recreation, etc.
4. Perquisites:
 These are normally provided to managerial personnel eitherto facilitate their job performance or to retain them in the organisation.Such perquisites include company car, club membership, free residentialaccommodation, paid holiday trips, stock options, etc.
1.3 Objectives of Compensation Management
 The basic objective of compensation management can be briefly termedas meeting the needs of both employees and the organisation. Since boththeseneeds emerge from different sources, often, there is a conflict between thetwo. This conflict can be understood by agency theory which explains relationshipbetween employees and employers. The theory suggests that employers andemployees are two main stakeholders in a business unit, the formerassuming therole of principals and the latter assuming the role of agents. Thecompensationpaid to employees is agency consideration. Each party to agency tries to fixthisconsideration in its own favour. The employers want to pay as little aspossibleto keep their costs low. Employees want to get as high as possible. Thecompensation management tries to strike a balance between these two withfollowing specific objectives:
1. Attracting and Retaining Personnel:
From organisation's point of view, thecompensation management aims at attracting and retaining right personnelin theorganisation. In the Indian corporate scene, there is no dirth of personnel atoperative levels but the problems come at the managerial and technicallevelsparticularly for growing companies. Not only they require persons who arewell
qualified but they are also retained in the organisation. In the present daycontext, managerial turnover is a big problem particularly in highknowledgebasedorganisations.
2. Motivating Personnel:
Compensation management aims at motivatingpersonnel for higher productivity. Monetary compensation has its ownlimitations in motivating people for superior performance. Alfie Kohn hasgoneto the extent of arguing that corporate incentive plans not only fail to workasintended but also undermine the objectives they intend to achieve. Hearguesthat this is due to inadequate psychological assumptions on which rewardsystems are based. His conclusions are as follows:A. Rewards punish people-their use confirms that someone else is in controlof the employee.B. Rewards rupture relationships-they create competition where teamworkand collaboration are desired.C. Rewards ignore reasons-they relieve managers from the urgent need toexplore why an employee is effective or ineffective.D. Rewards discourage risk taking-employees tend to do exactly what isrequired to earn the reward, and not any more.E. Rewards undermine interest-they distract both manager and the employeefrom consideration of intrinsic motivation.Notwithstanding these arguments, compensation management can bedesigned to motivate people through monetary compensation to someextent.
3. Optimising Cost of Compensation:
Compensation management aimsatoptimising cost of compensation by establishing some kind of linkage withperformance and compensation. It is not necessary that higher level of wagesand salaries will bring higher performance automatically but depends on thekind of linkage that is established between performance and wages andsalaries.Compensation management tries to attempt at this.
4. Consistency in Compensation:
Compensation management tries toachieveconsistency-both internal and external-in compensating employees.Internal consistency involves payment on the basis of criticality of jobs andemployees' performance on jobs. Thus, higher compensation is attached tohigher-level jobs. Similarly, higher compensation is attached to higherperformers in the same job. Level of jobs within an organisation isdeterminedby job evaluation which will be discussed little later in this chapter. External

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