Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment. It has two main components: direct financial payments( in the form of wages, salaries, incentives, commissions and bonuses) and indirect payments( in the form of financial benefits like employer-paid insurance and vacations).The components are usually as follows, Base pay : It is the basic compensation an employee gets, usually as a wage or salary. Variable pay : It is the compensation linked directly to performance accomplishments ( bonuses, incentives, stock options ,etc). Benefits : These are indirect rewards given to an employee or a group of employees as a part of organizational membership ( health insurance, vacation pay, retirement pension, etc)

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Compensation Management
‡ Compensation systems are designed keeping in minds the strategic goals and business objectives. ‡ Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities

DIRECT COMPONENTS : Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization.  BASE PAY : The fixed pay an employee receives on a regular basis.  PAY INCENTIVES : Programs designed to reward employees for good performance. These may include bonuses, profit sharing, merit pay, merchandise incentives, gift certificates, group travel, etc


The person is paid a ´piecerateµ for each unit he or she produces. Pay is tied directly to what the worker produces.we shall discuss some popular incentive plans.based pay to individual employees.INCENTIVES Under this topic . Individual incentive programs give performance. . Piecework Plans : Piecework is the oldest incentive plan and still the most commonly used.

a recent Mercer Consultants survey found that the recent average CEO pay mix was 16% salary.INCENTIVES Incentives for managers and Executives : Managers and executives play a central role in influencing divisional and corporate profitability and thus most firms put considerable thought into how to reward them. For example.22% bonus and 62% long-term incentives. Longterm incentive more often take the form of company stock options. . Employers generally pay out bonus and short term incentive awards in cash.

usually with a sizable salary component. . The firm·s profitability and growth affects its stock price and because the executive can affect these factors.INCENTIVES ‡ Stock Options : A stock option is the right to purchase a specific number of shares of the company stock at a specific price during a period of time. ‡ Incentives for sales people : Most companies pay their salespeople a combination of salary and commissions. Typical is a 70% base salary and 30% incentive mix. the stock options supposedly is an incentive.

special events. merchandise incentives. etc . o Social recognition program refers to more informal manager-employee exchanges such as praise.INCENTIVES ‡ Non-tangible and recognition based awards : Recognition is one of several types of non-tangible incentives. email or print communications. cash awards. group travels. approval or expressions of job well-done. gift certificates. training programs. The most used rewards to motivate employees were : employee recognition. o Recognition program refers to more formal manager-employee exchanges such as employee-ofthe month programs. individual travels.

It is one of the many gain sharing plans.INCENTIVES Scanlon Plan : One of the earliest Gain sharing Plans The Scanlon plan is an incentive plan developed in 1937 by Joseph Scanlon. a United Steel Workers Union official. the aims of which are to encourage improved employee productivity by sharing resulting financial gains with employees. considering that it is now about 70 years old. . The Scanlon plan is remarkably progressive.

The second feature is what practitioners call identity. The first is Scanlon·s philosophy of cooperation. This means to focus employee involvement. . This philosophy assumes that managers and workers must rid themselves of the ¶us· and ¶them· attitudes that normally hampers the development of a sense of ownership of the company.Scanlon Plan Scanlon plans have five basic features. prices and costs. 1. 2. the company must clearly articulate its mission or purpose and employees must understand how the business operates in terms of customers.

The fourth feature of the plan is the involvement system. all employees usually share in 75% of the savings.Scanlon Plan 3. If a suggestion is implemented and successful. Competence is a third basic feature.level committee. Employees present improvement suggestions to the appropriate departmental²level committees. which transmit valuable ones to the executive. 5. . 4. This suggests careful selection and training of employees. The fifth element is the sharing of benefits formula.

use productivity measures such as labor hours per unit produced or financial measures like return on investments etc. Decide on the funding formula. 2. 3. What portion of the gains will the employee receive? . Choose specific performance measures. Implementing a Gain sharing plan : 1. For eg.Gain sharing Plans Gain sharing plan is an incentive plan that engages employees in a common effort to achieve productivity objectives and share the gains. such as boosting productivity or lowering labor costs. Establish general plan objectives.

6. Develop involvement plan. Implement the plan. 5. . 8. update meetings. Choose the payment format. 7. Decide on a method of dividing and distributing the employees· share of the gains. Decide how often to pay bonus. The most common are steering committee. training programmes etc.Gain sharing Plans 4.

INCENTIVES ‡ Merit pay : or a merit raise is any salary increase the firm awards to an individual employee based on his individual performance.at ²risk pay plans : The basic characteristic of this plan is that some portion of the employees base salary is at risk. . ‡ The annual bonus : Plans that are designed to motivate short term performance of managers and are tied to company profitability. It is different from a bonus in that it is usually becomes part of the employee·s salary whereas a bonus is a one-time payment. ‡ Earnings.

INCENTIVES ‡ Team based pay-for²performance plans :These team based pay plans normally reward all team members equally. Advantages of team-based pay-for-performance : When properly designed. team based incentives have two major advantages:  They foster group cohesiveness  They aid performance measurement . based on group outcomes.

Those who contribute little to the teameither because of low effort or limited ability are free riders. In addition.S workers expect to be recognized for their personal contributions. ability levels differ from one person to the next. some individuals put in more effort than others.riding effect : In any group. .INCENTIVES Disadvantages of Team ² Based Pay-for-Performance Plans  Possible lack of fit with individualistic cultural values Because most U. they may not react well to an incentive system in which individual efforts take a back seat to the group effort.  The free.

.INDIRECT COMPENSATION INDIRECT COMPONENTS : Indirect compensation refers to benefits offered and provided to employees in lieu of the services provided by them to the organization.  BENEFITS : Indirect financial and non-financial payments. employees receive for continuing their employment with the Company.


unemployment insurance payments for laid. These include holidays. military duty.BENEFIT ADMINISTRATION Benefits represent an important part of just about every employee·s pay. Benefits are indirect monetary and non-monetary payments an employee receives for continuing to work for the Company. .  Pay for Time not worked : Also known as ¶Supplemental pay benefitsµ. sick leave.off or terminated employees. vacations. sabbaticals. it is one of an employer·s most expensive benefits because of all the time off that employees receive.

 Many firms use pooled paid leave plans. To prevent misuse of sick leave. Most firms are moving to a somewhat more flexible vacation leave approach. ‡ Sick leave : provides pay to employees when they are out of work because of illness. usually up to about 12 per year. The sick days often accumulate at the rate of approximately 1 day per month of service. following measures are taken.  Cash prizes  Aggressive investigation . Most sick leave policies grant full pay for a specified number of permissible sick days.  Some firms buy back unused sick leave day not used.BENEFIT ADMINISTRATION ‡ Vacations and Holidays : Most firms offer vacation leave benefits.

 It is common to award severance pay as part of a reduction in workforce. when employees quit or are fired for cause.  It is somewhat less common to award it when dismissing someone for poor performance. until they find new jobs.  It is a humanitarian gesture as well as good public relations  Severance pay is also given when employment is terminated by the Company without giving sufficient notice.BENEFIT ADMINISTRATION ‡ Severance pay : A one-time payment employers provide when terminating an employee.  Some firms provide ¶bridge· severance pay by keeping employees (especially managers) on the payroll for several months.  Severance pay serves as a shield from employee initiated litigations. .

. Medical and Disability Insurance Most employers offer their employees some type of hospitalization. Life Insurance : Employees can usually obtain insurance plans at lower rates in a group plan. which provide for weekly benefits if a person is unable to work through some fault other than his or her own. Hospitalization.provides income and medical benefits to work related accident victims or their dependents regardless of fault. Worker·s compensation .‡ ‡ ‡ ‡ BENEFIT ADMINISTRATION Unemployment insurance : All states have unemployment insurance or compensation acts. medical and prescription insurance.

BENEFIT ADMINISTRATION ‡          Welfare and recreational facilities : Credit societies Consumer stores Housing Welfare associations Holiday homes Educational facilities Transportation Club memberships Social gatherings .

BENEFIT ADMINISTRATION ‡ Old age and retirement benefits : Employers provide some benefits to the employees after retirement and during old age with a view to create a feeling of security about the old age.  Provident fund : The Employee·s Provident Fund. Both the employee and employer contribute to the fund. This provides security to the employees and their dependants during post retirement life. Family Pension fund and Deposit Linked Insurance Act 1952. Health insurance policies are also made available by organizations. The employees on attaining 15 years of membership are eligible for 100% of the contributions with interest.  Medical benefits : Some organizations provide medical benefits to their employees and their family members. .provides for the institution of Provident Fund.

The Payment of Gratuity Act 1972 is applicable to the establishments in the entire country.BENEFIT ADMINISTRATION  Pension : Pensions provide income to individuals in their retirement. Here the wage means the average of the basic pay last drawn by the employee.  Gratuity : This is another type of retirement benefit to be provided to an employee either on retirement or in case of a physical disability and to the dependents of the deceased employee. . The employee contributes to the contributory pension plan while the employer makes all the contributions to the noncontributory pension plan. The pension can be either contributory or noncontributory. The maximum amount of gratuity payable to an employee shall not exceed 20 months wage. The gratuity payable to an employee shall be at the rate of 15 days wage for every completed year of service.

sociologically and psychologically.  In most societies. a person·s earnings also serve as an indicator of power and prestige and are associated with feelings of self-worth.  In a nutshell. compensation affects a person economically. .NEED FOR A SOUND SALARY ADMINISTRATION From the employee·s perspective :  An employee paycheck is certainly important for its purchasing power.

 Retain Talent : Compensation can be a very strong influence on employee retention. Likewise more qualified people should get better salaries.NEED FOR SOUND SALARY ADMINISTRATION From an organization·s perspective :  Attract Talent : Compensation administration should be competitive and well administered to attract good talent.  Comply with legal aspects : A sound salary administration system should cater for all legal formalities and rules.  Ensure equity of pay: Pay should be equal the worth of a job. Similar jobs should get similar pay. .

given the corresponding differences in job responsibilities.EQUITY THEORY Adam·s equity theory emphasizes on equity in pay structure of employees remuneration. Employees should feel that the pay differentials among jobs are fair.external and individual. commitment and performance on job. These perceptions of equity directly impact motivation. .  Internal equity : involves perceived fairness of pay differentials among different jobs within an organization. The remuneration system needs to meet three types of equity : internal .

of specific people rather than of the job group. . position title or class to which they belong. It refers to the fairness of an individual·s pay as compared with what his or her co-workers are earning for the same or very similar jobs within the Company. commitment and performance. based on each individual·s performance. It is based on. What competitors pay to similar jobs will have its impact on employee motivation. the value to the institution .EQUITY THEORY  External equity : involves employees perception of the fairness of the remuneration relative to those outside the organization.  Individual equity : refers to the perceived fairness of individual pay decisions.

 Performance linked pays are very strong motivators. commitment and motivation in the employees. ensures that workers are neither underpaid nor overpaid.NEED FOR SOUND SALARY ADMINISTRATION  Encourages desired behavior : A sound compensation system should encourage loyalty. Also this should encourage risk taking.  Control costs : An effective compensation system. . initiative attitudes in them for operational improvements.

The going rate system involves fixing wage/salary in tune with what is paid by different units of an industry in a locality. A low wage may be fixed when the supply of labor exceeds the demand for it and vice-versa.FACTORS AFFECTING WAGE/SALARY LEVELS. EXTERNAL FACTORS :  Labor Market: Demand for and supply of labor influence wage and salary fixation. They can be categorized into (a) external and (b) internal factors. . A number of factors influence the remuneration payable to employees.

 Cost of living : A rise in the cost of living is sought to be compensated by payment of dearness allowance.  Labor Unions : The presence or absence of labor organizations often determine the quantum of wages paid to employees. Many Companies include an escalatory clause in their wage agreements in terms of which dearness allowance increases or decreases depending upon the movement of consumer price index (CPI). The employees of strongly unionized companies have no freedom in wage and salary fixation. basic pay to remain undisturbed.FACTORS AFFECTING WAGE/SALARY LEVELS. . They are forced to yield to the pressure of labor representative in determining and revising pay scales.

etc. With regard to managerial compensation.FACTORS AFFECTING WAGE/SALARY LEVELS. there is the Companies act1956.The Payment of Bonus Act 1965.which puts a cap on salary and perquisite of managers.  State Regulations : We have a plethora of labor laws at the central as well as at the state levels. Wages and allowances of Central and State government employees are determined through the Pay Commissions appointed by the government. the Minimum Wages Act1948. . Some of the laws which have a bearing on employee remuneration are the Payment of wages Act 1936.

and set of competencies. ‡ The nature of job : Jobs vary greatly in their difficulty. multinational companies also pay relatively high salaries due to their earning power.education and experience : This also includes the employees experience levels. ‡ Company·s ability to pay : High profit levels enable Companies to pay higher salaries. complexity and challenge. skills. Likewise. level of skills.FACTORS AFFECTING WAGE/SALARY LEVELS. ‡ Employee productivity/performance : Variable pays are often linked with worker ¶s productivity or employee performance. competency levels . . abilities. ‡ Employee knowledge. education.

etc) . ‡ Training .FACTORS AFFECTING WAGE/SALARY LEVELS. (eg.certification.( Doctors.Certified Professional accountant)  A license is a credential required by law to practice one·s occupation. nurses. CPA. licenses :  Training refers to a specialized course of instruction outside the realm of recognized academic degree programs  Certification refers to a specialized course of study resulting in a certificate upon successful completion.

According to the Oxford Dictionary . The word wage is defined by Oxford Dictionary.salary means fixed payment made by the employer at regular intervals usually monthly or quarterly to a person doing other than manual or mechanical work. . as an amount paid at regular intervals especially by a day or two or a month during which the workman or servants is at employers disposal.WAGE /SALARY The term salary is derived from the Latin word ´Salariumµ which means salt money paid to soldiers.

for the next 4 years. The pay is given in two ways. Rs1500-75-2100-100-2900-EB-1503500 is a scale in which one gets annual increments of Rs.75/.100 in the next 8 years with an efficiency bar at the pay of Rs2900/.COMPONENTS OF SALARY ‡ BASIC PAY . .Pay is the first and foremost important component of salary. one with a pay scale where the annual increments and periodical efficiency bars are mentioned.per annum for 8 years in this initial pay and Rs.which by crossing he will have an increments of Rs150/. For example.

COMPONENTS OF SALARY ‡ DEAR ALLOWANCE : The employees are also paid dearness allowances with a view to meet the rising prices due to inflation. . ‡ City Compensatory Allowance : It is generally believed that people living in metropolitan and large cities will have to incur more expenditure. The dearness allowance is fixed based on price index worked out by the government.a CCA is paid to the officers based on the city they live in. therefore to compensate the high cost of living .

apart from their normal duties are paid a fixed special pay as compensation for the extra work. .COMPONENTS OF SALARY ‡ HOUSE RENT ALLOWANCE : Officers and employees are entitled to HRA since they are supposed to pay higher rates of rent for houses in towns and cities. ‡ Special pay : Employees and officers who are assigned some special duties and function. the rates of HRA vary from 5% to 20% of the pay of the employee.

Components of Monthly Payroll of an Employee .

e. ‡Management Strategy ‡Compensation Plan Design ‡Performance COMPENSATION MODEL Management Strategy & Objectives Compensation plan design ‡Job analysis ‡Job description ‡Job evaluation ‡Labor market survey PERFORMANCE ‡Performance appraisal ‡Performance management 43 .keeping the following three elements in mind .Compensation Model The Compensation model should be designed .i.

WAGE POLICY From the employee point of view wages determine his standard of living. . Wage policy is an important issue and therefore the Constitution of India guaranteed ´ equal Pay for equal workµ for both men and women (Article 39) and reiterated that the State must endeavour to secure for all workers a living wage and conditions of work which ensure a decent standard of life( Article 43).

This is referred to as occupational wage differentials. industries and localities. demand-supply situation. experience. age. skills. REASONS FOR WAGE DIFFERENTIALS :  Interpersonal differentials : Differentials in sex. and also between persons in the same employment or grade.  Inter-occupational differentials : varying requirements of skill.WAGE DIFFERENTIALS Wage differ in different employments or occupations. knowledge. knowledge. .

demand and supply situation. degree of unionization. etc . ability of employers to pay. skill needs. employees· bargaining power.  Inter-firm Differentials : Ability of employer to pay.WAGE DIFFERENTIALS  Inter-area differentials : cost of living. extent of unionization.

Advantages of Wage differentials       Labour productivity Attracting people to different jobs Maximum utilization of human force Maximization of employee commitment Development of skills and knowledge Regulation of wages .

is distributed over several years. usually taking into account increases in sales and profits.COMPONENTS OF EXECUTIVE COMPENSATION ‡ a) Base salaries: Base salaries for CEOs are typically determined through competitive ´benchmarking. ‡ b) Short term incentives -Annual Bonus Plans: Virtually every for-profit company offers an annual bonus plan covering its top executives and paid annually based on a single-year·s performance. This bonus although earned in the current period. The bonus is mostly computed using a formula. .µ based primarily on general industry salary surveys and supplemented by detailed analyses of selected industry or market peers.

the price of the stock. . The logic of these perks is to attract and keep good managers and to motivate them to work hard in the organization·s interests. a specific amount of the company·s stock at a fixed price. ‡ c) Long term incentives -Stock options: Stock options have been common incentive offered to executives. at some time in the future. Under the assumption that good management will increase the company·s profitability and. They generally allow executives to purchase. stock options are viewed as performance based incentives. therefore.COMPONENTS OF EXECUTIVE COMPENSATION ‡ d) Perquisites: Executives are frequently offered a smorgasbord of perquisites not offered to other employees.

COMPONENTS OF EXECUTIVE COMPENSATION ‡ e) Golden Parachute: A popular benefit that accrued to top executives in the early 80s was the ´golden parachuteµ. . These parachutes provide either a severance salary to the departing executive or a guaranteed position in the newly created (merged) organization. It was designed by top executives as a means of protecting themselves if a merger took place.

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