Compensation Management

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction. Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing total compensation package. The traditional concept of wage and salary administration emphasized on only determination of wage and salary structures in organizational settings. However, over the passage of time, many more forms of compensation as discussed earlier, entered the business field which necessitated to take wage and salary administration in comprehensive way with a suitable change in its nomenclature. Beach has defined wage and salary administration as follows: "Wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organizational problems, development and maintenance of wage structure, establishing rules for administering wages. Wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items"

Components of Compensation system:
The literal meaning of compensation is to counter-balance. In the case of human resource management, compensation is referred to as money and other benefits received by an employee for providing services to his employer. Money and benefits received may be in different forms-base compensation in money fonn and various benefits, which may be associated with employee's service to the employer like provident fund, gratuity, and insurance scheme, and any other payment which the employee receives or benefits he enjoys in lieu of such payment. Cascio has defined compensation as follows: "Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity” Based on above description of compensation, we may identify its various components as follows: Wage and Salary: Wage and salary are the most important component of compensation and these are essential irrespective of the type of organization. Wage is referred to as remuneration to workers particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar employees including managerial personnel. Wages and salary are paid on the basis of fixed period of time and normally not associated with productivity of an employee at a particular time. Incentives: Incentives are the additional payment to employees besides the payment of wages and salaries. Often these are linked with productivity, either in terms of higher production or cost saving or both. These incentives may be given on individual basis or group basis. Fringe Benefits: Fringe benefits include such benefits which are provided to 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. Perquisites: These are normally provided to managerial personnel either to facilitate their job performance or to retain them in the organization. Such perquisites include company car, club membership, free residential accommodation, paid holiday trips, stock options, etc.

According to economic theory, wages are defined broadly as any economic compensation paid by the employer to his laborers under some contract for the services rendered by them. In its actual sense which is prevalent in the practice,

" Subsequent to the committee's report. These concepts are: minimum wage. the payment of minimum wages is mandatory. For the calculation of wages. Such a wage is determined keeping in view the national income and paying capacity of industrial sector. soon after the independence. Government of India set up a Committee on Fair Wages in 1948 which has defined various concepts of wages which govern the wage structure in the country specially in those sectors which can be termed as underpaid and where workers do not have bargaining power through unions. the earnings of women. the Conference suggested the following guidelines:  The standard working class family should be taken to consist of three consumption units for the earner. This has led to the development of several theories of wages such as subsistence theory by Ricardo. In the second phase fair wages were to be established in the community and industry. Lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimum wage. In the final phase the working class was to be paid the living wage. Traditionally. Fair Wage: The concept of fair wage is linked with the capacity of the industry to pay.  Fuel.  In respect of housing. " Living wage is more than the concept of minimum wage. For this purpose. " . living wage. etc. Later.  The clothing requirements should be estimated at a per capita consumption of 18 yards per annum per person. "Minimum wage is the wage which must provide not only for the bare sustenance of life. children and adolescents should be disregarded. The Committee has defined fair wage as follows: "Fair wage is the wage which is above the minimum wage but below the living wage. residual claimant theory by Frascis Walker. In the Indian context. and fair wage. Indian Labor Conference elaborated the concept of fixation of minimum wars which were termed as need-based minimum wages. bargaining theory by John Davidson and behavioral theory by James March and Herbert Simon. minimum wage must provide some measure of education. clothing and shelter but a measure of frugal comfort including education for his children. The Committee also observed that since the national income did not support the payment of living wage. marginal productivity theory by Philip Wickstted and John Clark.  The minimum food requirements should be calculated on the basis of the net intake of 2. the norms should be the minimum rent charged by the  Government in any area for houses provided under subsidized housing scheme for low-income groups. In the initial stage the wages to be paid to the entire working class were to be established and stabilized. wage fund theory by Adam Smith. Each theory tries to explain how wages are determined. According to the above committee. Wherever this Act applies. protection against ill-health. it should be implemented in three phases. the concept of need based minimum wage was added. requirements of essential social needs and a measure of insurance against the more important misfortunes including old age. 1948. Minimum Wage: A minimum wage is one which has to be paid by an employer to his workers irrespective of his ability to pay. This Act does not define the concept of minimum wages but empowers the Central Government as well as State Governments to fix minimum wages from time to time. Living Wage: Along with the minimum wage the Committee on Fair Wages has given the concept of living wage which has been defined as follows: "A living wage is one which should enable the earner to provide for himself and his family not only the bare essentials of food. medical requirements and amenities. they did not have any say in the determination of wages paid to them.700 calories per adult. The lower limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity of the industry to pay. In 1957. but for the preservation of the efficiency of the workers.wages are paid to workers which include basic wages and other allowances which are linked with the wages like dearness allowances. Let us have a brief look at these concepts. surplus value theory by Karl Marx. in the absence of any bargaining power possessed by laborers. Government enacted legal provisions regarding minimum wages under the Minimum Wages Act.

inefficiency percolates to efficient workers too. the wage is determined on the basis of time worked which may be hourly. Piece Wage Method: In piece wage method workers are paid wages according to the quantity of output during a specified period. A worker is paid wage for the time worked irrespective of his output during that time.  Labor cost of production becomes difficult to determine in advance because wages are not linked to output. in order to avoid hardship to employees.  Where machinery and raw materials are quite sophisticated which require handling with utmost care like processing of precious metals.  Where supervision is good and the supervisors can estimate a fair day's work. Various merits and demerits of time wage system suggest that this system can be followed in some jobs but not in all. the critical question that emerges is whether the wage will be linked to time spent on the workplace or output achieved during a specified period.  This system does not differentiate between efficient and inefficient workers: gradually. These two basic systems have their own relative merits and demerits. Piece wage method too has its own merits and demerits.  It is quite easy to understand and calculate the amount of wages to be paid. Time Wage Method: In time wage method. e. This may be calculated on the basis of number of units produced or the completion of a job where output is not measurable in terms of individual units. This system is more suitable in the following situations:  Where units of output are not measurable precisely like office work.  It demotivates efficient workers for more output as they are put at par with inefficient ones.g. Such factors are labor productivity prevailing wage rates. Perhaps. fair wage depends on different variables affecting wage determination.  Where individual employees do not have direct control on their outputs like assembly work. Merits of Time Wage: This method is applied more commonly because it has certain inherent merits which are as under:  There are certain jobs in which output within a specified period is not easily measurable. In such a case wage payment is linked to time. daily.  Where quality of work is more pronounced and requires creative imagination like artistic work. the concept of fair wages is followed by the most business organizations. a combination of these two methods is followed to ensure the payment of minimum wages. Methods of Wage Payment: In devising system of wage determination.  Where workers' unions oppose the introduction of piece rate system. Let us see how these methods work. monthly or any other time base. Sometimes.  It ensures the payment of regular and specific wages which is beneficial from social point of view. This method is known as balance method.  Both employers and workers know well in advance the amount of wages payable and they can adjust their budgets accordingly. even an illiterate worker can understand it.  Thus.  Where work is of highly varied nature and standards of outputs cannot be ascertained like research work. Employees tend to take easy approach. the level of national income and its distribution and the capacity of industry to pay. .  Product/service quality tends to be high as workers are not in hurry to produce more without regard to quality. time wage system suffers from a number of drawbacks and if the workers are not adequately motivated for higher performance This system can generate inefficiency in the following ways:  Since there is no direct linkage between performance and wages. This results into two types of wages time wage and piece wage. Demerits of Time Wage: Though adopted more commonly. At present. this is the oldest and most prevalent system of wage payment. weekly. There is a possibility that wrong employees are placed on the job. The job of a peon.Thus.  Since productivity is not a criterion for fixing wages.

 If there is a short supply of labor. This method has its relevance in a workplace where the work flow is irregular like docks.  There may be jealousy and interpersonal conflict among workers because of their uneven earnings at the same workplace.  Where production methods are standardized and job is of repetitive nature.Merits of Piece Wage: Piece wage method has the following merits:  There is a direct relationship between output and wages which works as a motivating factor to workers to produce more.  Where workmanship is not required. Hence progressive employers consider this factor also. Various merits and demerits of piece wage system indicate that this system is not suitable for all conditions but only to specific conditions which are as follows:  Where the output of each individual worker can be measured precisely. if the laborers are not organized.  Prevailing wage rates: Prevailing wages in a particular industry are also taken into account by the employers while deciding wage levels for their employees. usually on weekly or monthly basis.  There is a tendency on the part of the employers to cut piece rate if workers' earnings are quite high.  This is fair and equitable so far as utilization of human resources is concerned. the management may fix low wages. he is also motivated to produce more because of inclusion of piece wage system. the wages tend to be low. Demerits of Piece Wage: Piece wage system has the following demerits:  There is a problem in fixing piece rate in the absence of any standardized procedure.  The product quality and machinery conditions are likely to suffer because workers concentrate more on quantity rather than quality.  The method does not ensure minimum wages as output may be adversely affected by factors beyond control. and this will enable them to retain and attract qualified workers to the organizations. the laborers may not be in a position to make both ends meet and this will affect their efficiency. their bargaining power would be high and they can demand higher rates of wages. Thus. if a worker produces more quantity in a period. If this factor is not considered. . Balance Method: Balance method also known as debt method. is essentially a combination of time wage and piece wage methods.  Labor unions: If the laborers are well organized into strong trade unions.  Trade unions generally oppose this system because of the fear of discrimination among workers based on their working. we may summarize the factors affecting wage rates as under:  Demand for and supply of labor: Demand and supply conditions of labor have considerable influence on the determination of wage rates. Under this method.  Cost of living: The cost of living of workers also has a strong influence on the rate of wages. Factors Affecting Wages: On the basis of above discussion.  The organization can estimate its cost of production well in advance because wage cost is directly proportional to output.  It. a worker is guaranteed a fixed wage based on time rate with a provision of piece wage method. By considering the prevailing wage level. On the other hand. employers will come reasonable close to the wage level of competitors. At the same time. requires less supervision if there is in-built system for product quality control. and earns more than his time wage.  It differentiates efficient and inefficient workers and provides incentives to inefficient workers to become efficient. the wages may be high whereas if there is no dearth of labor.  Where the quantity of output is a direct result of skills and efforts of individual workers. he is given credit for additional output which is compensated in another period in which production quantity falls below the time wage. This method provides a sense of security to a worker so far as his wage earning is concerned.  When the flow of work is regular and work interruptions do not occur.

Incentives: ‘Incentive’ may be defined as any reward of benefit given to the employee over and above his wage or salary with a view to motivating him to excel in his work. In some other organizations annual increases based on merit. They are designed to stimulate human effort by rewarding the person. to a large extent. Jobs requiring specialized knowledge or involving much mental or manual effort are priced higher than those which are light or which do not need any specialized knowledge. the prevailing system of granting increments also affects wages. Clark Dickinson the important incentives for work can be listed as follows:  Desire for livelihood and fear of want. A scheme of incentive is a plan to motivate individual or group performance.  Impulse to activity or joy in work and dislike of inactivity.  Doing something worthwhile (Good). But this compensation alone cannot bring job satisfaction to the workers. Thus. pride in the job and in firm and concern for the overall good cannot be brought by a bonus. Job requirements: Job requirements are also an important factor affecting wages. Hence the modern authorities on management science have recognized the need for the provision of incentives to build up good morale.  A chance to get somewhere (Opportunity).  The moral command and fear of conscience. over and above the time rated remuneration. The following are some of the definitions of the term ‘Incentive’:  Wage incentives are extra financial motivation. Incentives for work: Incentives can take any form. As the State assumes responsibility for safeguarding the interest of citizens. it has to step in to regulate the wage rates of laborers through legislative measures. for improvements in the present or targeted results” – The National Commission on Labor.  Know what’s going on (Communication). The ability to pay in turn is determined by the profit-earning capacity of the enterprise. One cannot expect effective performance from a worker who is dissatisfied with its job.  Conditions at work (Environment) . Sociologists and industrial psychologists also view that the financial aspect is not the only dominant motivating force. Robert E.  “It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job” – Hummel and Nickerson.  Trust in leadership. even if he is well paid.    Ability to pay: The wage level. Incentives include both monetary as well as non-monetary rewards. According to Z.  Desire for approval of master and fear of punishment. a small group.  Doing my share (Participation)  I count for something (Recognition). Salton has mentioned the following nine factors as the Motives for work.  “It is any formal and announced programme under which the income of an individual. Confidence in the management. is determined by the ability of the enterprise to pay its workers. Need for incentive: It is true that monetary compensation does constitute very important reason for the working of an employee. Increment system: In some organizations wages automatically increase annually at a prescribed rate without any relation to workers’ performance.  A decent living (Fair Wages).  A safe future (Security). a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity output” – Scott. State regulation: State regulation is another important factor influencing wage rtes.  Desire for praise and fear of being dismissed.

demotion and termination. Pride in job: The workers must be made to feel pride in their job. Financial Incentives Financial incentives or pecuniary incentives are the most original of all the incentives. drinking etc. Delegation of Responsibility: Delegation of rights and responsibilities to execute a given task often proves to be a strong motivating factor. But it is high in those concerns where they have a feeling of job security. provisions of facilities for development and training. Some of the popular ones are given below: Job Security: The management must try its best to create a sense of job security. can effectively stimulate the workers pride in their job and in the firm. medical expenses etc. fair treatment. Thus. Efficient people would naturally like to get recognition for their skill and excellence in their work. ethical conduct etc. Further additional cash wage may also tempt the workers to misuse the money in vices like gambling. and  Non-financial Incentives. Various techniques can be employed to develop pride to work. Experiences of foreign countries particularly countries like Britain. ethical conduct etc. There should be no risk of retrenchment. Since they actually take part in the decision-making their co-operation is assured. Of course it is not practicable for the superiors to praise everybody for every thing done by them. Recognition: Recognition of work is the essence of securing good work. the nonfinancial incentives have a significant role to play. But the technique of praise must be practiced as far as possible. dynamic leadership. bonus and other incentives directly given to the workers in the form of cash. also have a significant role to play in motivating the employees. Food products. Under such circumstances. shelter etc. Various techniques can be employed to develop pride to work. Food products.  Financial Incentives. By delegation the superior trusts his workers and stimulates them to show better results. The financial incentives still form the most important influencing and motivating factor up to a certain limit. America and Japan have shown that there is a high degree of positive correlation between non-financial benefit schemes and labor productivity. which stimulate exertion. Direct incentives include wages. the workers by virtue of the non-financial incentives are enabled to enjoy a richer and fuller life. Participation: Workers feel more satisfied when they are given an opportunity to raise their voice in handling the affairs of the enterprise. They make the working class more stabilized and economically sound. Non-Financial Incentives can take a variety of forms. Non-financial incentives: Non-financial or non-pecuniary incentives include all other influences planned or unplanned. . provision of labor welfare amenities etc. in short. Other Incentives: Other incentives like quick promotion. Because it is only by virtue of the monetary compensation that the workers can satisfy their fundamental needs such as food. It is given in the form of money. Such incentives create a healthy atmosphere and change the mental outlook of the workers. Mere monetary incentive cannot help the management in solving all the problems of industrial unrest. Such recognition can do many things that what a cash reward can do. The financial incentives may be either direct or indirect. can effectively stimulate the workers’ pride in their job and in the firm. Experiences have also shown that the productivity is less in those concerns where workers have no feeling of safe and secure. Sincere Interest in Subordinates as Individual Persons: The workers must be made to feel pride in their job. fair treatment.Classification of Incentives: All forms of incentives can be broadly classified into two kinds namely. Indirect financial incentives include subsistence allowance expenses. dynamic leadership. clothing.

They begin to see every minute in terms of money. the cost per unit becomes less and second. This leads to higher output. Rate of labor turnover is bound to be low: If adequate incentives are available to the workers. has to decide whether to retain them or subject them to rigorous training. Problems arising out of incentives: The following problems are bound to arise while implementing an incentive plan: Quality of work may suffer: The workers. . This leads to reduction in complaints and grievances. does not arise. in spite of the incentive schemes. This happens in two ways. Greater profits: Needless to say. the workers become time conscious. Such workers are sure to have greater work commitment and therefore may not leave the organization. First. Reduction in complaints and grievances: As the organization makes available suitable incentives to the workers. No problem of idle time: In an organization where no proper incentives are available for the workers. thus. they may handle the machines carelessly. The need for close supervision. This may promote ill feelings among the employees of an organization. is bound to be low. Possible to identify inefficient and dull workers: If. they may not have a feeling of dissatisfaction. Inter-personnel relationships may suffer: Only those employees who are really efficient will be benefited out of incentives. as a result. higher output results in greater profits for the business. the workers become duty conscious. This increases the wear and tear of machines. some workers are able to earn only their normal wage. higher commission and so on. Efficient workers are able to earn more: Such of those workers who are highly efficient are able to earn more by way of performance bonus. The employer. they may not have anything to complain about. Wear and tear of machines may be more: As the employees are keen on increasing the output all the time. Health of the workers may get affected: Some workers tend to overwork in order to earn more and this may affect their health. the employer is able to induce them to work better. When suitable incentives are available. the enterprise is able to keep the selling price low and this result in greater sales.Merits of Incentives: The following are the advantages derived by providing incentives to employees: Higher output: By providing incentives to his employees. those in the production department in particular. may give undue importance to the quantity of output produced neglecting the quality of output. therefore. The rate of labor turnover. Such a problem can be overcome only if the organization has a perfect system of quality control. it should mean that they are basically dull. Supervision does not pose any problem: When suitable incentives are available. the tendency will be to while away the time.

Assured minimum wage: Payment to any worker should not be totally related to his performance. It necessitates the maintenance of proper records and books. paid lunch periods. food cost subsidy. unemployment compensation. shift premium. Consensus between the workers and the management is necessary for the success of the plan. profit sharing. it should be cost effective. . grievance time. Fringe Benefits: The fringe benefits are categorized as follows:  Payment for Time Not worked: Benefits under this category include: sick leave with pay. Proper machinery should be installed for the quick handling of all such complaints. Every worker should be assured of a minimum wave notwithstanding performance. bargaining time. Consensus required: The management should not take a unilateral decision while evolving an incentive scheme. The results of evaluation should be made known to the employees at the earliest.Increase in accidents: There is always a preference to step up output disregarding even safety regulations and this may increase the rate of accidents in the workplace. if any. for the extra efforts made by them. Simple to operate: The incentive plan should not involve tedious calculations. Review: The progress of the incentive scheme should be periodically reviewed. Requirements of a sound incentive plan: A good incentive plan shall fulfill the following requirements: Trust and confidence: The success of any incentive plan depends on the existence of an atmosphere of trust and confidence between the workers and the management. Sound system of evaluation: A perfect system of evaluating the employee’s performance should be created in the organization. paid rest and relief time. Christmas bonus. recreation. at a rate higher than the normal rate of wages. it should offer return. travel time etc. From the workers' point of view. Redressing grievances: Grievances and complaints are bound to arise whenever any incentive plan is in vogue in the organization. Only then the workers would have a sense of security. In the absence of such an atmosphere. It should be so simple that the worker will be in a position to work out his total earnings himself. incentive bonus. Only then it would be possible to notice and remove defects. No scope for bias or favoritism: The standards set under the incentive plan should be based on objective analysis. the workers may resist any such proposal by the management. Increase in paper work: Proper administration of any incentive scheme involves lot of paper work. vacation pay. in the plan. It should not expect too much out of the employee nor should it give scope for bias or favoritism. Beneficial to both the workers and the management: The incentive plan should be beneficial to both the workers and the management. From the management's point of view.  Extra Pay for time Worked: This category covers the benefits such as: premium pay. Deewali or Pooja bonus. old age insurance. housing subsidy.

Workers are eligible for compensation as stated above even in case of closing down of undertakings. safety of buildings and machinery etc. provident fund. . latrine urinals. health insurance. The compensation is paid at the rate of 15 days wage for every completed year of service with a maximum of 45 days wage in a year. cooperative credit societies. leave for maternity. sick benefits. life insurance. Objectives of Fringe Benefits: The view point of employers is that fringe benefits form an important part of employee incentives to obtain their loyalty and retaining them. beauty parlor services. technological adjustment pay. drinking water. housing. protection of eyes. hospitalization. leave travel pay. Safety and Health: Employee’s safety and health should be taken care of in order to protect the employee against accidents. and medical benefits for retired employees. probation of employment of women and children near cotton openers. explosive or inflammable dust. hoists and lifts. lifting machines. medical care. gratuity. The fringe benefits are classified under four heads as given here under: Employment Security: Benefits under this head include unemployment. old age counseling. disposal of waste and effluents. These provisions relate to cleanliness. Provisions relating to safety measures include fencing of machinery. Participation and Stimulation: This category covers the following benefits: anniversary awards. revolving machinery. stress counseling. self-acting machines. lighting. disability insurance. floors. 1948. leave for grievances. safety measures etc. canteen. sick leave. The benefit of confirmation of the employee on the job creates a sense of job security. cost of living bonus. Old Age and Retirement: Benefits under this category include: deferred income plans.  To motivate the employees by identifying and satisfying their unsatisfied needs. The important objectives of fringe benefits are:  To create and improve sound industrial relations  To boost up employee morale. traveling concession to retired employees. In India. and spittoons. The nonseasonal industrial establishments employing 50 or more workers have to give one month’s notice or one month’s wages to all the workers who are retrenched after one year’s continuous service. Personnel Identification. pressure plant. 1947 provides for the payment of compensation in case of lay-off and retrenchment. dust and fume. employment of young persons on dangerous machines. attendance bonus. insurance. power to require specifications of defective parts of test of stability. recreational programs. jobs to sons/daughters of the deceased employee and the like. stipulated certain requirements regarding working conditions with a view to provide safe working environment. over-crowding. employees are entitled to lay-off compensation at the rate to 50% of the total of the basic wage and dearness allowance for the period of their lay-off except for weekly holidays. the Factories Act. work on or near machinery in motion. pension. striking gear and devices for cutting off power. unhealthy working conditions and to protect worker’s capacity. Employee Security: Physical and job security to the employee should also be provided with a view to promoting security to the employee and his family members. gas etc. call-back pay. Health Protection: Benefits under this head include accident insurance. holidays. Retrenchment Compensation: The Industrial Disputes Act. jobs to the sons/daughters of the employees and the like. excessive weights. Precautions in case of fire. quality bonus. easing of new machinery. Lay-off Compensation: In case of lay-off. old age assistance. level for negotiation. overtime pay. artificial humidification. ventilation and temperature. retiring rooms. income tax aid. lay-off. etc. educational facilities. Lay-off compensation can normally be paid up to 45 days in a year.Organizations provide a variety of fringe benefits. counseling. Further a minimum and continuous wage or salary gives a sense of security to the life. precautions against dangerous fumes. chains ropes and lifting tackles.

Core-plus plans consist of a core of essential benefits and a menu-like selection of other benefits options from which employees can select and add to the core.      To provide qualitative work environment and work life. number and age of dependents. Typically. Traditional benefit programs were designed for the typical employees of the 1950s—. at least partly. To create a sense of belongingness among employees and to retain them. so that they may be protected against the insecurity arising from unemployment. with each module put together to meet the needs of a specific group of employees. They can be uniquely tailored to reflect differences in employee needs based on age. Company benefits-and-services programs are among some of the mechanisms which managers use to supply this security. and the like. Flexible benefits. to the employees who are responsible for it. The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting from increasing industrialization should go. and expanded health coverage. fringe benefits are called golden hand-cuffs. greater pressure has been placed upon competing organizations to match these benefits in order to attract and keep employees. sickness. evolution and implementation of a number of compensation plans. increasingly heavy urbanization and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the adverse impact of these developments. To promote employee’s welfare by providing welfare measures like recreation facilities. To provide security to the employees against social risks like old age benefits and maternity benefits. core-plus options. To meet requirements of various legislations relating to fringe benefits. do meet these diverse needs. So a module designed for single employees with no dependents might include only essential benefits. some benefits-and-services programs were adopted by employers The growing volume of labor legislation. injury and old age. Another. It replaces the traditional “one-benefit-plan-fits-all” programs that dominated organizations for more than 50 years. Since it was workers who are responsible for production. a third are part of two-income families with no children. however. each employee is given “benefit credits. While 25% of today’s employees are single. Need for Extending Benefits to Employees:      Rising prices and cost of living has brought about incessant demand for provision of extra benefit to the employees. made it imperative for employers to share equally with their employees the cost of old age. particularly social security legislation.” which allow the “purchase” . As a result. Rapid industrialization. Hence. To protect the health of the employees and to provide safety to the employees against accidents. disability insurance. survivor and disability benefits. Modular plans are pre-designed packages of benefits.a male with wife and two children at home. As organizations have developed ore elaborate fringe benefits programs for their employees. Employers too have found that fringe benefits present attractive areas of negotiation when large wage and salary increases are not feasible. As such these traditional programs don’t tend to meet the needs of today’s more diverse workforce. and flexible spending accounts. marital status. The average organization provides fringe benefits worth approximately 40% of an employee’s salary. The idea is to allow each employee to choose a benefit package that is individually tailored to his or her own needs and situation. spouses’ benefit status.     Flexible Benefits: What are Flexible Benefits? Flexible benefits allows allow employees to pick benefits that most their needs. The growth and strength of trade unions has substantially influenced the growth of company benefits and services. The three most popular type of benefit plans are modular plans. Less than 10% of employees now fit this stereotype. Recognition that fringe benefits are non-taxable rewards has been major stimulus to their expansion. Labor scarcity and competition for qualified personnel has led to the initiation. might have additional life insurance. it was held that employers should accept responsibility for meeting some of the needs of their employees. designed for single parents.

President. The money in the plan is invested into one or more funds provided in the plan according to choices made by the employee. Of course we know that assumption is false.. The compensation paid to employees is agency consideration. 401k Compensation system: There are two main types of employer-sponsored retirement plans: defined benefit and defined contribution. General Manager etc. Flexible spending accounts can increase employee take-home pay because employees don’t have to pay taxes on the dollars they spend out of these accounts. Each party to agency tries to fix this consideration in its own favor. This money is deducted before the employee’s paycheck is taxed. sometimes by as much as 100 percent. a bank trust dept. the matching contributions. Employers frequently match employee contributions up to a certain level. A defined benefit plan. The tax deferral an obvious plus. Linking Flexible Benefits and Expectancy Theory: Giving all employees the same benefits assumed that all employees have the same needs. And a similar survey of 307 firms in the United Kingdom found that while only 16% have flexible benefits programs in place. Consistent with expectancy theory’s thesis that organizational rewards should be linked to each individual employees goals. This conflict can be understood by agency theory which explains relationship between employees and employers. or an insurance company.of additional benefits that uniquely meet his or her needs. the plan sets the amount of the contributions that an employer makes. not the benefit it will pay at retirement. often. flexible benefits turn the benefit expenditure into a motivator. and the sense of control due to the ability to choose one’s own investments. often years or even decades later. but are not required to do so. In India and most countries of Asia with the exception of Japan Flexible benefits are not offered by employers for various reasons which may create personnel and trade union problems. which is much less risky than short-term investing. Employees like 401(k) plans for several reasons.. for example. The plans usually are intended to earn money over a very long period of time. It may take a few more years to offer flexible benefits to employees in India and other Asian counties by the managements. Employees want to get as high as possible. In 1978. section 401(k)of the Internal Revenue Code authorized a new kind of defined contribution plan that allows the employee to make pre-tax contributions to the plan. sets the amount that the employer will pay to workers upon their retirement. so that it remains untaxed until it is taken out of the plan. another 60% are either in the process of implementing them or are seriously considering them. flexible benefits individualized rewards by allowing each employ to choose the compensation package that best satisfies his or her current needs. Since both these needs emerge from different sources. The employee agrees to put part of his or her salary into the plan through automatic deductions each pay period. Objectives of Compensation Management: The basic objective of compensation management can be briefly termed as meeting the needs of both employees and the organization. Others popular features include the increased portability of this plan from one employer to another. the former assuming the role of principals and the latter assuming the role of agents. Vice President. for employees to pay for health-care and dental premiums. It’s a convenient way. And they are becoming a norm in other countries too. there is a conflict between the two. In defined contribution plans. For instances a recent survey of 136 Canadian Organizations found that 93% have adopted flexible benefits or will in the near term. such as a traditional pension plan. In India some flexible benefits are offered in a limited way to the top management personnel like Executive Directors. the employer sets up a special savings and investment account with an investment company. The theory suggests that employers and employees are two main stakeholders in a business unit. Flexible Benefits in Practice: Today almost all major Corporations in the United States offer Flexible benefits. In a 401(k) plan. Flexible spending plans allow employees to set aside up to the dollar amount offered in the plan to pay for particular services. Thus. The compensation management tries to strike a balance between these two with following specific objectives: . The employers want to pay as little as possible to keep their costs low.

compensation management tries to reduce this disparity. the compensation management aims at attracting and retaining right personnel in the organization. adopt different strategies and matching compensation strategy and blend of different compensation methods.  Rewards undermine interest-they distract both manager and the employee from consideration of intrinsic motivation. it can be seen that organizations follow different strategies in different market situations and align their compensation strategy and contents with these strategies. Notwithstanding these arguments. it should proceed as a process. Alfie Kohn has gone to the extent of arguing that corporate incentive plans not only fail to work as intended but also undermine the objectives they intend to achieve. Similarly. In a growing market. compensation management can be designed to motivate people through monetary compensation to some extent. In the present day context. Monetary compensation has its own limitations in motivating people for superior performance.  Rewards rupture relationships-they create competition where teamwork and collaboration are desired. and not any more. Level of jobs within an organization is determined by job evaluation which will be discussed little later in this chapter. Compensation management tries to attempt at this. His conclusions are as follows:  Rewards punish people-their use confirms that someone else is in control of the employee. He argues that this is due to inadequate psychological assumptions on which reward systems are based. In such a growing market. Though there are many factors involved in the determination of wage and salary structure for a job in an organization which may result into some kind of disparity in the compensation of a particular job as compared to other organizations. Compensation Management Process: In order to achieve the objectives of compensation management.Attracting and Retaining Personnel: From organization’s point of view. Motivating Personnel: Compensation management aims at motivating personnel for higher productivity. higher compensation is attached to higher performers in the same job. managerial turnover is a big problem particularly in high knowledge based organizations.  Rewards ignore reasons-they relieve managers from the urgent need to explore why an employee is effective or ineffective. Thus. do . an organization can expand its business through internal expansion or takeover and merger of other organizations in the same line of business or a combination of both. higher compensation is attached to higher-level jobs. Not only they require persons who are well qualified but they are also retained in the organization. Companies operating in different types of market/product having varying level of maturity. there is no dirth of personnel at operative levels but the problems come at the managerial and technical levels particularly for growing companies. Optimizing Cost of Compensation: Compensation management aims at optimizing cost of compensation by establishing some kind of linkage with performance and compensation. the inputs. particularly human resources. Thus.  Rewards discourage risk taking-employees tend to do exactly what is required to earn the reward. Internal consistency involves payment on the basis of criticality of jobs and employees' performance on jobs. In the Indian corporate scene. It is not necessary that higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries. This process has various sequential steps as shown:  Organization’s strategy  Compensation policy  Job analysis and evaluation  Analysis of contingent factors  Design and implementation of compensation plan  Evaluation and review Organization’s Strategy: Organization’s overall strategy though not a step of compensation management is the starting point in the total human resource management process including compensation management. Consistency in Compensation: Compensation management tries to achieve consistency-both internal and external-in compensating employees. External consistency involves similar compensation for a job in all organizations.

average cash and moderate incentives may work. it is implemented. it will generate results either in terms of intervening variables like employee satisfaction and morale or in terms of end-result variable like increase of productivity. Sometimes. Therefore. these are determined by external party. the companies do the following:  They recognize remuneration as a pivotal control and incentive mechanism that can be used flexibly by the management to attain business objectives. many external factors which impinge on the policy must also be taken care of Job Analysis and Evaluation. Evaluation and Review: A compensation plan is not a rigid and fixed one but is dynamic since it is affected by a variety of factors which are dynamic. seniority. If it does not work as intended. the organization has to harvest profit through cash generation and cost cutting and if this cannot be sustained over the long run. The evaluation of compensation plan must be done in this light. In such a situation. pay commissions for Government employees as well as for public sector enterprises. various incentive plans. Job analysis also provides base for job evaluation which determines the relative worth of various jobs in the organization. which must include the basis for determining base compensation. In the declining market. this latter variable is more important. Analysis of Contingent Factors: Compensation plan is always formulated in the light of various factors. The policy should be linked with the organizational philosophy on human resources and strategy. compensation management should have a provision for evaluating and reviewing the compensation plan. Therefore. the organization may be able to design its compensation plan incorporating base compensation with provision of wage/salary increase over the period of time. . which affect the operation of human resource management system. skills. such as those that involve planning and control. The impact of these factors will be discussed later. incentives and benefits and various types of perquisites to various levels of employees. there should be review of the plan necessitating a fresh look. Besides. In such a case.  They view the company's performance as the ultimate criterion of the success of the strategic pay decisions and operational remuneration programmes. After designing the compensation plan. These factors may be analyzed through wage/salary survey. In mature market. Job analysis provides basis for defining job description and job specification with the former dealing with various characteristics and responsibilities involved in a job and the latter dealing with qualities and skills required in job performer. The relative worth of various jobs determines the compensation package attached with each job. cost of living.not grow in the same proportion as the business expands. However. The benefits which have been standardized have to be maintained. Compensation Policy: Compensation policy is derived from organizational strategy and its policy on overall human resource management. etc. Various internal factors are organization’s ability to pay and employees' related factors such as work performance. social factors. Various external factors are conditions of human resource market. Implementation of compensation plan requires its communication to employees and putting this into practice. compensation strategy involves cost control with below average cash and incentive payments. Design and Implementation of Compensation Plan: After going through the above steps. In order to make compensation management to work effectively. the organization does not grow through additional investment but stabilizes and the growth comes through making the present investment more effective. level of economic development.  They make the pay system an integral part of strategy formulation. for example. benefits and perquisites. the organization should clearly specify its compensation policy. pressure of trade unions and various labor laws dealing with compensation management. Cascio has observed that in viewing the compensation from strategic point of view. For example. After implementation of the plan. both external and internal.  They integrate pay considerations into strategic decision-making processes. information technology is a fast growing business presently and we find maximum merger and higher managerial compensation in this industry. in order to make the growth strategy successful. the organization has to pay high cash to attract talents. Designing and Developing the Compensation Plan: Develop a program outline:  Set an objective for the program. known as learning curve growth. the possible retrenchment of business to invest somewhere else.

 Review the market price of benchmark jobs within the industry. Establish grade pricing and salary range:  Establish benchmark (key) jobs. where the company wants to be in relation to salary ranges in the industry).  Determine who will oversee the program once it is established. Determine an appropriate salary structure:  Determine the difference between each salary step.  Verify the purpose.  Present data and charts to the compensation committee for review and adjustment. and so on (e. Conduct a job analysis of all positions:  Conduct a general task analysis by major departments. incentive-based versus non-contingent pay).  Finalize and document all job descriptions. to determine their specific job functions. within each department. as necessary.  On the basis of required tasks and forecasted business plans.  Determine whether the company should set salaries at.  Compare the matrix with data from both the company structure and the industry wide market. professional employees. Designate an individual to oversee designing the compensation program:  Determine whether this position will be permanent or temporary.  Determine the cost of going outside versus looking inside.  Interview department managers and key employees.  Determine the cost of a consultant's review. Determine a budget.  Develop a final draft of job descriptions.e. to review job descriptions. develop a matrix of jobs crossing lines and departments. Develop a compensation philosophy:  Form a compensation committee (presumably consisting of officers or at least including one officer of the company).  Develop model job descriptions for exempt and nonexempt positions and distribute the models to incumbents for review and comment. necessity.senior. as necessary.  Determine the number of pay grades. . or monetary range of a position at a particular level. and other appropriate departments to determine the organizational structure and primary functions of each.  Meet with department managers. differences should exist in pay structures for executives. intermediate.  Determine a minimum and a maximum percent spread. or below market.  Establish target dates for implementation and completion. hourly versus salaried rates.  Establish a trend line in accordance with company philosophy (i. production. finance.  Decide the extent to which employee benefits should replace or supplement cash compensation. What tasks must be accomplished by whom?  Get input from senior vice presidents of marketing. administration.  Slot the remaining jobs.for each job family and assign a grade to each level. Determine grades:  Establish the number of levels ..g. or other reasons for maintaining a position. if any..  Decide which job classifications should be exempt and which should be nonexempt. Evaluate jobs:  Rank the jobs within each senior vice president's and manager's department.  Prepare a matrix organizational review.  Prepare flow charts of all ranks for each department for ease of interpretation and assessment.  Verify ranking by comparing it to industry market data concerning the ranking. sales. and beginner . junior. above.  Review job descriptions. sales employees. adjust job descriptions if necessary. and adjust if necessary.  Decide what. and then rank jobs between and among departments.

using slide shows or movies. Meet with the compensation committee for review.  Develop and document a strategy for merit raises and other pay increases. and approval. review. Obtain top executives' approval of the basic salary program:  Develop and present cost impact studies that project the expense of bringing the present staff up to the proposed levels.  Present data to the executive operating committee (senior managers and officers) for review and approval. and forms.g.  Develop a plan for communicating the new program to employees. Communicate the final program to employees and managers:  Present the plan to the compensation committee for feedback. literature. performance appraisal forms. adjustments. . and approval.  Present data to the compensation committee for review.  Execute test runs on the human resources information system. Develop a salary administration policy:  Develop and document the general company policy. bonuses. a merit raise schedule). handouts. and to create effective monitoring reports for senior managers.  Develop and document procedures to justify the policy (e. Monitor the program:  Monitor feedback from managers. adjustment. and promotions.  Make a presentation to executive staff managers for approval or change.. procedures.  Work with HR information systems staff to establish effective implementation procedures.  Design and develop detailed systems.  Make presentations to managers and employees. and approval.  Meet with the compensation committee for review.  Make changes where necessary.  Find flaws or problems in the program and adjust or modify where necessary. adjustments.  Have the necessary forms printed. etc. such as cost-of-living adjustments.  Develop and determine format specifications for all reports. and approval.  Execute the program. Implement the program. to develop appropriate data input forms. annual reviews. adjustments. and incorporate necessary changes.  Develop and document specific policies for selected groups.