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– The sum total of all forms of payments or rewards provided to employees for performing tasks to achieve organizational objectives
Compensation- Nature and scope
• The complex process includes decisions regarding variable pay and benefits • It suggests an exchange relationship between the employee and the organization • It involves design, development, implementation, communication and the evaluation of reward strategy and process of the organization
To align employees’ future performance with organizational goals To communicate the employees their worth to the organization To provide employee social status . 7. To reward employees’ past performance fairly. 4. 6. in line with efforts. 3.Compensation Objectives 1. 2. skills and competencies To attract and retain competitive high performing employees To motivate the high performing employees and reinforce desirable employee behaviour To remain competitive in the labor market 5.
and on being better.. and speed. • IBM . – Focuses employees’ attention on the values of winning.• Strategic compensation – Using the compensation plan to support the company’s strategic aims. and more competitive. faster. execution.
philosophies. objectives. – Seeks to motivate employees through compensation.Strategic Compensation Planning • Strategic Compensation Planning – Links the compensation of employees to the mission. – Serves to identify the net monetary payments made to employees with specific functions of the HR program in establishing a pay-forperformance standard. . and culture of the organization.
resulting in longer-term employees in a position earning less than workers entering the firm today) • Geographic costs of living differences .Compensation Policy Issues • • • • • • • • Pay for performance Pay for seniority Salary increases and promotions Overtime and shift pay Probationary pay Paid and unpaid leaves Paid holidays Salary compression (A salary inequity problem. generally caused by inflation.
Pay Structure Pay grades Pay ranges Compensation Administration Process .
Total compensation Financial (extrinsic rewards) Non -Financial (intrinsic rewards) Direct Indirect Satisfaction derived from job Praise and rewards Classification of rewards .
Components of Financial Compensation Direct Variable Pay Incentives -Individual -Group/team -organizational Mandatory Indirect Benefits voluntary •Vacations • Breaks • Holidays Security Plans • Pensions Base pay • Wages • Salaries Provident Fund Gratuity Maternity Leave Health plans Medical leave Educational assistance • Recreational programs .
Salaried : receive consistent payments at the end of specific period regardless of number of hours worked .Hourly/wage: payment for the number of hours worked .Base pay • The direct financial compensation an individual receives based on the time worked • Two bases of calculation .
Job Evaluation – The formal systematic means used to identify the relative worth of jobs within an organization.• Nature – generally market driven ( D>S=increase in pay) . .
it is linked to individual. . • Systematic soldiering: the tendency of employees to work at the slowest pace possible and to produce at the minimum acceptable level. . or organizational performance and not to time worked Incentive Pay Programs – Establish a performance “threshold” to qualify for incentive payments. group. • • Frederick Taylor – Popularized scientific management and the use of financial incentives in the late 1800s. – Emphasize a shared focus on organizational objectives.Variable pay/ pay for performance : Incentives • Variable Pay .any plan that ties pay to productivity or profitability. – Create shared commitment in that every individual contributes to organizational performance and success. (i.e)The standard by which managers tie compensation to employee effort and performance.
Types of incentives • Individual Incentives • Group/team Incentives • Organizational Incentives .
An incentive may be paid for exceeding the piece rate standard.Individual Incentive Plans • Piecework Plans – The worker is paid a sum (called a piece rate) for each unit he or she produces.” – If employees finish the work in less than the expected time. . • Standard hour plan: – An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time. • Straight piecework: A fixed sum is paid for each unit the worker produces under an established piece rate standard. their pay is still based on the standard time for the job multiplied by their hourly rate.
equitable. and powerful incentives – Employee resistance to changes in standards or work processes affecting output – Quality problems caused by an overriding output focus – Possibility of violating minimum wage standards – Employee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output .Individual Incentive Plans (cont’d) • Pro and cons of piecework – Easily understandable.
Individual Incentive Plans (cont’d)
• Merit pay
– A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.
– Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.
• Spot bonus
– Unplanned bonus given for employee effort unrelated to an established performance measure.
Group Incentive Plans
• Team Incentive Plans
– Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.
• Establishing Team Incentive Payments
– Set performance measures upon which incentive payments are based – Determine the size of the incentive bonus. – Create a payout formula and fully explain to employees how payouts will be distributed.
Group Incentive Plans (cont’d) • Gainsharing Plans – Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability. • Scanlon • Rucker • Improshare .
Improshare Gainsharing based on increases in productivity of the standard hour output of work teams. Rucker Plan (SOP) Shared rewards come from the difference between labor costs and sales value of production. .Employee Bonus and Gainsharing Plans Scanlon Plan Rewards come from employee participation in improving productivity and reducing costs.
thereby building a team culture. • Team incentives encourage cross-training and the acquiring of new interpersonal competencies.The Pros and Cons of Team Incentive Plans PROS • Team incentives support group planning and problem solving. • Unlike incentive plans based solely on output. • Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards. . • The contributions of individual employees depend on group cooperation. team incentives can broaden the scope of the contribution that employees are motivated to make.
• Intergroup social problems—pressure to limit performance (for example. . • Complex payout formulas can be difficult for team members to understand.The Pros and Cons of Team Incentive Plans (cont’d) CONS • Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus. team members are afraid one individual may make the others look bad) and the “free-ride” effect (one individual puts in less effort than others but shares equally in team rewards)—may arise.
Organizational Incentive Plans • Profit Sharing – Any procedure by which an employer pays. or makes available to all regular employees. current or deferred sums based upon the profits of the enterprise. – Paid once in a year or deferred sums until retiremement Challenges: • Agreement over division of profits between company and employees. • Possibility of no payout due to financial condition of company. . in addition to their base pay.
coca cola. nike . – Apple . – The value of an option is subject to stock market conditions at the time that option is exercised.Organizational Incentive Plans • Stock Options – Granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period. yahoo.
USA and several other industrialized countries). And to trusts established for employee stock options.Organizational Incentive Plans • Employee Stock Ownership Plans (ESOPs) – Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees. This provide tax concessions to corporate orgns.( UK. (i.e (difference between acceptance price and market value) • The employer establishes an ESOP trust that qualifies as a taxexempt employee trust under Section 401(a) of the Internal Revenue Code .
• Rewards can have unintended consequences.” • Rewards punish.Why Incentive Plans Fail • Performance pay can’t replace good management. . • Rewards undermine intrinsic motivation. • Rewards rupture relationships. • “Pay is not a motivator. • You get what you pay for. • Rewards may undermine responsiveness.
Emphasize long-term as well as short-term success. Set effective standards. commitment-oriented approach. Use good measurement systems. Make sure effort and rewards are directly related. . Adopt a comprehensive. Make the plan easy for employees to understand. Get employees’ support for the plan. View the standard as a contract with your employees.Implementing Effective Incentive Plans • • • • • • • • • • Ask: Is effort clearly instrumental in obtaining the reward? Link the incentive with your strategy.
provided at the discretion of the employer .legally binding • VOLUNTARY BENEFITS .Indirect Financial CompensationBenefits • MANDATORY BENEFITS .
LG Electronics Family day at office. HLL sabbaticals (paid/ non-paid) are provided to employees who wish to study. Yes Bank... CPCL etc • Family Paternity leave in HLL.Bharti telecom.ADITYA BIRLA GROUP. “Joyful Working Team” and “ Happy Moments Board”. Meritorious Children of employees are provided opportunity of higher education with loan benefits in BPCL.VOLUNTARY BENEFITS-EXAMPLES • Educational benefits Employee’s spouse education assistance( Motorola on international assignments ). ONGC. Wedding anniversary allowance in NIIT. HCL Tech. SPIC etc.NIIT . - - - . Genpact etc.
Amended finance act 2005 .• Fringe benefits tax .
• Intrinsic motivators are worthwhile as financial package • Organization reward high performing employees • Psychological rewards that employees receive in recognition of their skills and contributions .Non financial compensation : components – Are most effective as motivators when the award is combined with a meaningful employee recognition program.
sincere and specific way. • - Service awards Award for the length of service and exactly not on performance - IBM: thanks award IDEA: appreciation card . – Employees feel appreciated when employers tie awards to performance and deliver awards in a timely. – Rooms of offices are named after the employees in NIIT • Recognition awards – Recognition has a positive impact on performance. • Combining financial rewards with nonfinancial ones produced performance improvement in service firms almost twice the effect of using each reward alone. – Best performer of the month awards in Blue Dart. ALACTEL. either alone or in conjunction with financial rewards. and service to the organization. special contributions or achievements.Types • Awards – Often used to recognize productivity gains. – Day-to-day recognition from supervisors.. peers.XANSA etc. and team members is important.
.Needs and Motivation • Abraham Maslow’s Hierarchy of Needs – Five increasingly higher-level needs: • physiological (food. sex) • security (a safe environment) • social (relationships with others) • self-esteem (a sense of personal worth) • self-actualization (becoming the desired self) – Lower level needs must be satisfied before higher level needs can be addressed or become of interest to the individual. water.
salary. self-actualization) needs. – The best way to motivate someone is to organize the job so that doing it helps satisfy the person’s higherlevel needs.Needs and Motivation (cont’d) • Herzberg’s Hygiene–Motivator theory – Hygienes (extrinsic job factors) • Inadequate working conditions. – Motivators (intrinsic job factors) • Job enrichment (challenging job. feedback and recognition) addresses higher-level (achievement. and incentive pay can cause dissatisfaction and prevent satisfaction. .
Equity and motivation of employees • Pay Equity (also Distributive Fairness) – An employee’s perception that compensation received is equal to the value of the work performed. . • Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs. – A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
. the greater the motivation to reduce the inequity.Relationship between Pay Equity and Motivation Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio.
I. • Instrumentality: the connection between performance and the appropriate reward. then there is no motivation to work toward the reward. – Motivation = E x I x V • If any factor (E. • Employee confidence building and training. accurate appraisals. and knowledge of workers’ desired rewards can increase employee motivation.Instrumentality and Rewards • Vroom’s Expectancy Theory – A person’s motivation to exert some level of effort is a function of three things: • Expectancy: that effort will lead to performance. or V) is zero. . • Valence: the value the person places on the reward.
Determinants of compensation Pay levels .
• Employee’s Relative Worth – Rewarding individual employee performance • Employer’s Ability-to-Pay – Having the resources and profits to pay employees. • Worth of a Job – Establishing the internal wage relationship among jobs and skill levels. or match competitors’ pay. lag. .Internal determinants • Employer’s Compensation Strategy – Setting organization compensation policy to lead.
• Area Wage Rates – A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs. .External Determinants • Labor Market Conditions – Availability and quality of potential employees is affected by economic conditions. and the presence of unions. government regulations and policies.
External Determinants • Cost of Living – Local housing and environmental conditions can cause wide variations in the cost of living for employees. – Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power. .
and one or more workers’ organizations on the other to (a) Determine the working conditions and terms of employment and / or (b) Regulate relations between employer and employee/workers and / or (c) regulate relations between employer organization or employee/workers organization . group of employers or one or more employers’ organizations on the one hand.External Determinants • Collective Bargaining The term extends to all negotiations that take place between an employer.
Competency based pay using Broad banding .New developments • Competency based pay and reward programmes (also skill-based pay or knowledge-based pay) .
What Is Competency-based Pay? • Competency-based pay – Where the company pays for the employee’s range. • Competencies – Demonstrable characteristics of a person. rather than for the job title he or she holds. depth. including knowledge. skills. and behaviors. and types of skills and knowledge. . that enable performance.
knowledge. and competencies is more strategic. . • Measurable skills. • Paying for skills. and competencies are the heart of any company’s performance management process.Why Use Competency-Based Pay? • pay plans that aim for high-performance work system. knowledge.
and a process for tying the person’s pay to his or her skill – A training system that lets employees seek and acquire skills – A formal competency testing system – A work design that lets employees move among jobs to permit work assignment flexibility.Competency-Based Pay in Practice • Main components of skill/competency/ knowledge–based pay programs: – A system that defines specific skills. .
Competency-Based Pay: Pros and Cons • Pros – Higher quality – Lower absenteeism and fewer accidents • Cons – implementation problems – Cost implications of paying for unused knowledge. skills and behaviors – Complexity of program – Uncertainty that the program improves productivity .
” each of which contains a relatively wide range of jobs and salary levels. .• Broadbanding – Consolidating salary grades and ranges into just a few wide levels or “bands. • Wide bands provide for more flexibility in assigning workers to different job grades. • Lack of permanence in job responsibilities can be unsettling to new employees.
Trends in Executive Compensation • The Executive Pay Package – Base salary – Short-term incentives or bonuses – Long-term incentives or stock plans – Perquisites (perks) .
Why are they made more? • Supply is short • Most important to organization in terms of their competencies • Motivation and retention .
• Time periods for judging and rewarding performance are too short. • Subjective in nature • Emphasis is placed upon equaling or exceeding executive salary survey averages.Executive Compensation: Ethics and Accountability • Incentive payments are excessive compared with return to stockholders. . • Benefits do not relate closely to individual performance.
The “Sweetness” of Executive Perks • Company car • Company plane • Executive eating facilities • Financial consulting • Company-paid parking • Personal liability insurance • Estate planning • First-class air travel • Home computers • Chauffeur service • Children’s education • Spouse travel • Physical exams • Mobile phones • Large insurance policies • Income tax preparation • Country club membership • Luncheon club membership • Personal home repairs • Loans • Legal counseling • Vacation cabins .
Remedial • Conscious efforts must be made by organization to increase the supply • Participative management must be encouraged • Income beyond a limit must be subject to higher taxation • Remuneration committees must be constituted .
Negotiation Collective Bargaining • The term extends to all negotiations that take place between an employer. group of employers or one or more employers’ organizations on the one hand. and one or more workers’ organizations on the other to • Determine the working conditions and terms of employment and / or • Regulate relations between employer and employee/workers and / or • regulate relations between employer organization or employee/workers organization .
Collective bargaining and stakeholders • Concerned parties during the process of negotiation are The government The employers/ management The workers/trade unions The consumers/ community .
Influencing the atmosphere .Influencing the consistency .Influencing the procedures .Obtaining substantial results .Influencing the balance of power between parties .Negotiation techniques and skills • Negotiation is the process in which two or more parties who have common and conflicting interested come together and talk with a view to reaching an agreement • It involves 5 key activities .
Negotiation results • • • • Win-win Lose-win Lose-lose Win-win .
1965 Equal remuneration Act.Legal framework for payment of salary in INDIA • • • • Payment of wages Act. 1936 The minimum wages Act. 1976 . 1948 The payment of Bonus Act.
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