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,

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

Methods of Wage Payment: In devising system of wage determination. a combination of these two methods is followed to ensure the payment of minimum wages. Demerits of Time Wage: Though adopted more commonly. The job of a peon. Various merits and demerits of time wage system suggest that this system can be followed in some jobs but not in all. inefficiency percolates to efficient workers too.  Labor cost of production becomes difficult to determine in advance because wages are not linked to output. There is a possibility that wrong employees are placed on the job. Employees tend to take easy approach.  It demotivates efficient workers for more output as they are put at par with inefficient ones. This system is more suitable in the following situations:  Where units of output are not measurable precisely like office work.  It is quite easy to understand and calculate the amount of wages to be paid. Perhaps. This method is known as balance method.  This system does not differentiate between efficient and inefficient workers: gradually. Piece Wage Method: In piece wage method workers are paid wages according to the quantity of output during a specified period.  Where workers' unions oppose the introduction of piece rate system. the level of national income and its distribution and the capacity of industry to pay.  Where quality of work is more pronounced and requires creative imagination like artistic work.  Where supervision is good and the supervisors can estimate a fair day's work. Let us see how these methods work. At present. In such a case wage payment is linked to time. fair wage depends on different variables affecting wage determination. the wage is determined on the basis of time worked which may be hourly. monthly or any other time base. 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. 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. weekly.  It ensures the payment of regular and specific wages which is beneficial from social point of view. 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.  Product/service quality tends to be high as workers are not in hurry to produce more without regard to quality.Thus. e. Such factors are labor productivity prevailing wage rates. the concept of fair wages is followed by the most business organizations.  Since productivity is not a criterion for fixing wages. 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.  Where work is of highly varied nature and standards of outputs cannot be ascertained like research work.  Both employers and workers know well in advance the amount of wages payable and they can adjust their budgets accordingly. daily.g. A worker is paid wage for the time worked irrespective of his output during that time. These two basic systems have their own relative merits and demerits.  Thus. this is the oldest and most prevalent system of wage payment. Time Wage Method: In time wage method.  Where machinery and raw materials are quite sophisticated which require handling with utmost care like processing of precious metals. Piece wage method too has its own merits and demerits. .  Where individual employees do not have direct control on their outputs like assembly work. in order to avoid hardship to employees. Sometimes. even an illiterate worker can understand it.

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

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

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

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

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

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

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

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

Consistency in Compensation: Compensation management tries to achieve consistency-both internal and external-in compensating employees. compensation management can be designed to motivate people through monetary compensation to some extent. it should proceed as a process. adopt different strategies and matching compensation strategy and blend of different compensation methods. higher compensation is attached to higher performers in the same job. Motivating Personnel: Compensation management aims at motivating personnel for higher productivity. Compensation management tries to attempt at this. managerial turnover is a big problem particularly in high knowledge based organizations. Not only they require persons who are well qualified but they are also retained in the organization. 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. Level of jobs within an organization is determined by job evaluation which will be discussed little later in this chapter. Similarly. 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. the compensation management aims at attracting and retaining right personnel in the organization. Optimizing Cost of Compensation: Compensation management aims at optimizing cost of compensation by establishing some kind of linkage with performance and compensation. there is no dirth of personnel at operative levels but the problems come at the managerial and technical levels particularly for growing companies. compensation management tries to reduce this disparity. He argues that this is due to inadequate psychological assumptions on which reward systems are based. 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.  Rewards rupture relationships-they create competition where teamwork and collaboration are desired. His conclusions are as follows:  Rewards punish people-their use confirms that someone else is in control of the employee. In a growing market. External consistency involves similar compensation for a job in all organizations. particularly human resources. do . Compensation Management Process: In order to achieve the objectives of compensation management. Companies operating in different types of market/product having varying level of maturity.  Rewards ignore reasons-they relieve managers from the urgent need to explore why an employee is effective or ineffective. In the present day context. the inputs.  Rewards discourage risk taking-employees tend to do exactly what is required to earn the reward. and not any more. 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. it can be seen that organizations follow different strategies in different market situations and align their compensation strategy and contents with these strategies. Monetary compensation has its own limitations in motivating people for superior performance.  Rewards undermine interest-they distract both manager and the employee from consideration of intrinsic motivation. 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. Thus.Attracting and Retaining Personnel: From organization’s point of view. Thus. higher compensation is attached to higher-level jobs. Internal consistency involves payment on the basis of criticality of jobs and employees' performance on jobs. Notwithstanding these arguments. In such a growing market. In the Indian corporate scene.

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

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

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

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