Compensation – The sum total of all forms of payments or rewards provided to employees for perf orming tasks to achieve

organizational objectives Rs

Compensation- Nature and scope • The complex process includes decisions regarding variable pay and benefits • It su ggests an exchange relationship between the employee and the organization • It inv olves design, development, implementation, communication and the evaluation of r eward strategy and process of the organization

Compensation Objectives 1. 2. 3. 4. To reward employees’ past performance fairly, in line with efforts, skills and com petencies To attract and retain competitive high performing employees To motivat e the high performing employees and reinforce desirable employee behaviour To remain competitive in the labor market 5. 6. 7. To align employees’ future performance with organizational goals To communicate th e employees their worth to the organization To provide employee social status

• Strategic compensation – Using the compensation plan to support the company’s strategic aims. – Focuses emplo yees’ attention on the values of winning, execution, and speed, and on being bette r, faster, and more competitive.. • IBM

Strategic Compensation Planning • Strategic Compensation Planning – Links the compensation of employees to the mission, objectives, philosophies, an d culture of the organization. – Serves to identify the net monetary payments made to employees with specific functions of the HR program in establishing a pay-fo rperformance standard. – Seeks to motivate employees through compensation.

Compensation Policy Issues • • • • • • • • Pay for performance Pay for seniority Salary increases and promotions Overtim nd shift pay Probationary pay Paid and unpaid leaves Paid holidays Salary compre ssion (A salary inequity problem, generally caused by inflation, resulting in longer-term employees in a position earning less than wo rkers entering the firm today) • Geographic costs of living differences

Pay Structure

Pay grades Pay ranges Compensation Administration Process

Total compensation Financial (extrinsic rewards) Non -Financial (intrinsic rewar ds) Direct Indirect Satisfaction derived from job Praise and rewards Classification of rewards

Components of Financial Compensation Direct Variable Pay Incentives -Individual -Group/team -organizational Mandatory Indirect Benefits voluntary •Vacations • Breaks • Holidays Security Plans • Pensions Base pay • Wages • Salaries Provident Fund Gratuity Maternity Leave Health plans Medical leave Educational assistance • Recreational programs

Base pay • The direct financial compensation an individual receives based on the time worke d • Two bases of calculation - Hourly/wage: payment for the number of hours worked - Salaried : receive consistent payments at the end of specific period regardle ss of number of hours worked

• Nature – generally market driven ( D>S=increase in pay) - Job Evaluation – The formal systematic means used to identify the relative worth of jobs within a n organization.

Variable pay/ pay for performance : Incentives • Variable Pay - any plan that ties pay to productivity or profitability. (i.e)The standard by which managers tie compensation to employee effort and performance. - it is linked to individual, group, or organizational performance and not to t ime worked Incentive Pay Programs – Establish a performance “threshold” to qualify for incentive payments. – Emphasize a s hared focus on organizational objectives. – Create shared commitment in that every individual contributes to organizational performance and success. • • Frederick Taylor – Popularized scientific management and the use of financial incentives in the lat e 1800s. • Systematic soldiering: the tendency of employees to work at the slowest pace pos sible and to produce at the minimum acceptable level.

Types of incentives • Individual Incentives • Group/team Incentives • Organizational Incentives

Individual Incentive Plans • Piecework Plans – The worker is paid a sum (called a piece rate) for each unit he or she produces. • Straight piecework: A fixed sum is paid for each unit the worker produces under an established piece rate standard. An incentive may be paid for exceeding the p iece rate standard. • Standard hour plan: – An incentive plan that sets pay rates based on the completion of a job in a pred etermined “standard time.” – If employees finish the work in less than the expected ti me, their pay is still based on the standard time for the job multiplied by thei r hourly rate.

Individual Incentive Plans (cont’d) • Pro and cons of piecework – Easily understandable, equitable, and powerful incentives – Employee resistance to changes in standards or work processes affecting output – Quality problems caused by an overriding output focus – Possibility of violating minimum wage standards – E mployee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output

Individual Incentive Plans (cont’d) • Merit pay – A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.

Bonuses • Bonus – Incentive payment that is supplemental to the base wage for cost reduction, qual ity improvement, or other performance criteria. • Spot bonus – Unplanned bonus given for employee effort unrelated to an established performanc e measure.

Group Incentive Plans • Team Incentive Plans – Compensation plans where all team members receive an incentive bonus payment whe n production or service standards are met or exceeded. • Establishing Team Incentive Payments – Set performance measures upon which incentive payments are based – Determine the s ize of the incentive bonus. – Create a payout formula and fully explain to employe es how payouts will be distributed.

Group Incentive Plans (cont’d) • Gainsharing Plans – Programs under which both employees and the organization share the financial gai ns according to a predetermined formula that reflects improved productivity and profitability. • Scanlon • Rucker • Improshare

Employee Bonus and Gainsharing Plans Scanlon Plan Rewards come from employee participation in improving productivity and reducing costs. Rucker Plan (SOP) Shared rewards come from the difference between labor costs and sales value of p roduction. Improshare Gainsharing based on increases in productivity of the standard hour output of wo rk teams.

The Pros and Cons of Team Incentive Plans PROS • Team incentives support group planning and problem solving, thereby buildin g a team culture. • The contributions of individual employees depend on group coop eration. • Unlike incentive plans based solely on output, team incentives can broa den the scope of the contribution that employees are motivated to make. • Team bon uses tend to reduce employee jealousies and complaints over “tight” or “loose” individua l standards. • Team incentives encourage cross-training and the acquiring of new i nterpersonal competencies.

The Pros and Cons of Team Incentive Plans (cont’d) CONS • Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus. • Intergroup social prob lems—pressure to limit performance (for example, team members are afraid one indiv idual may make the others look bad) and the “free-ride” effect (one individual puts in less effort than others but shares equally in team rewards)—may arise. • Complex payout formulas can be difficult for team members to understand.

Organizational Incentive Plans • Profit Sharing – Any procedure by which an employer pays, or makes available to al l regular employees, in addition to their base pay, current or deferred sums bas ed upon the profits of the enterprise. – Paid once in a year or deferred sums unti l retiremement Challenges: • Agreement over division of profits between company and employees. • Possibility of no payout due to financial condition of company.

Organizational Incentive Plans • Stock Options – Granting employees the right to purchase a specific number of shares of the comp any’s stock at a guaranteed price (the option price) during a designated time peri od. – The value of an option is subject to stock market conditions at the time tha t option is exercised. – Apple , yahoo, coca cola, nike

Organizational Incentive Plans • Employee Stock Ownership Plans (ESOPs) – Stock plans in which an organization contributes shares of its stock to an estab lished trust for the purpose of stock purchases by its employees.( UK,USA and se veral other industrialized countries). This provide tax concessions to corporate orgns. And to trusts established for employee stock options. (i.e (difference b etween acceptance price and market value) • The employer establishes an ESOP trust that qualifies as a taxexempt employee tr ust under Section 401(a) of the Internal Revenue Code

Why Incentive Plans Fail • Performance pay can’t replace good management. • You get what you pay for. • “Pay is not a motivator.” • Rewards punish. • Rewards rupture relationships. • Rewards can have unintended consequences. • Rewards may undermine responsiveness. • Rewards undermine intrinsic motivation.

Implementing Effective Incentive Plans • • • • • • • • • • Ask: Is effort clearly instrumental in obtaining the reward? Link the inc with your strategy. Make sure effort and rewards are directly related. Make the plan easy for employees to understand. Set effective standards. View the standar d as a contract with your employees. Get employees’ support for the plan. Use good measurement systems. Emphasize long-term as well as short-term success. Adopt a comprehensive, commitment-oriented approach.

Indirect Financial CompensationBenefits • MANDATORY BENEFITS - legally binding • VOLUNTARY BENEFITS - provided at the discretion of the employer

VOLUNTARY BENEFITS-EXAMPLES • Educational benefits Employee’s spouse education assistance( Motorola on international assignments ). O NGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to e mployees who wish to study. Meritorious Children of employees are provided oppor tunity of higher education with loan benefits in BPCL, CPCL etc • Family Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc., Wedding anniversary al lowance in NIIT, SPIC etc., “Joyful Working Team” and “ Happy Moments Board”- LG Electro nics Family day at office- Bharti telecom. -

• Fringe benefits tax - Amended finance act 2005

Non financial compensation : components – Are most effective as motivators when the award is combined with a meaningful em ployee recognition program. • Intrinsic motivators are worthwhile as financial package • Organization reward hig h performing employees • Psychological rewards that employees receive in recogniti on of their skills and contributions

Types • Awards – Often used to recognize productivity gains, special contributions or achievement s, and service to the organization. – Employees feel appreciated when employers ti e awards to performance and deliver awards in a timely, sincere and specific way . – Rooms of offices are named after the employees in NIIT • Recognition awards – Recognition has a positive impact on performance, either alone or in conjunction with financial rewards. • Combining financial rewards with nonfinancial ones produced performance improvem ent in service firms almost twice the effect of using each reward alone. – Day-to-day recognition from supervisors, peers, and team members is important. – B est performer of the month awards in Blue Dart, ALACTEL,XANSA etc., • Service awards Award for the length of service and exactly not on performance IBM: thanks award IDEA: appreciation card

Needs and Motivation • Abraham Maslow’s Hierarchy of Needs – Five increasingly higher-level needs: • physiological (food, water, sex) • security (a safe environment) • social (relations hips with others) • self-esteem (a sense of personal worth) • self-actualization (be coming the desired self) – Lower level needs must be satisfied before higher level needs can be addressed o r become of interest to the individual.

Needs and Motivation (cont’d) • Herzberg’s Hygiene–Motivator theory – Hygienes (extrinsic job factors) • Inadequate working conditions, salary, and incentive pay can cause dissatisfacti on and prevent satisfaction. – Motivators (intrinsic job factors) • Job enrichment (challenging job, feedback and recognition) addresses higher-leve l (achievement, self-actualization) needs. – The best way to motivate someone is to organize the job so that doing it helps s atisfy the person’s higherlevel needs.

Equity and motivation of employees • Pay Equity (also Distributive Fairness) – An employee’s perception that compensation received is equal to the value of the w ork performed. – A motivation theory that explains how people respond to situation s in which they feel they have received less (or more) than they deserve. • Individuals form a ratio of their inputs to outcomes in their job and then compa re the value of that ratio with the value of the ratio for other individuals in similar jobs.

Relationship between Pay Equity and Motivation Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More The greater the perceived disparity between my input/output ratio and the compar ison person’s input/output ratio, the greater the motivation to reduce the inequit y.

Instrumentality and Rewards • Vroom’s Expectancy Theory – A person’s motivation to exert some level of effort is a function of three things: • Expectancy: that effort will lead to performance. • Instrumentality: the connectio n between performance and the appropriate reward. • Valence: the value the person places on the reward. – Motivation = E x I x V • If any factor (E, I, or V) is zero, then there is no motivation to work toward t he reward. • Employee confidence building and training, accurate appraisals, and k nowledge of workers’ desired rewards can increase employee motivation.

Determinants of compensation Pay levels

Internal determinants • Employer’s Compensation Strategy – Setting organization compensation policy to lead, lag, or match competitors’ pay. • Worth of a Job – Establishing the internal wage relationship among jobs and skill levels. • Employee’s Relative Worth – Rewarding individual employee performance • Employer’s Ability-to-Pay – Having the resources and profits to pay employees.

External Determinants • Labor Market Conditions – Availability and quality of potential employees is affected by economic conditio ns, government regulations and policies, and the presence of unions. • Area Wage Rates – A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.

External Determinants • Cost of Living – Local housing and environmental conditions can cause wide variations in the cost of living for employees. – Inflation can require that compensation rates be adjus ted upward periodically to help employees maintain their purchasing power.

External Determinants • Collective Bargaining The term extends to all negotiations that take place betwe en an employer, group of employers or one or more employers’ organizations on the one hand, and one or more workers’ organizations on the other to (a) Determine the working conditions and terms of employment and / or (b) Regulate relations betw een employer and employee/workers and / or (c) regulate relations between employ er organization or employee/workers organization

New developments • Competency based pay and reward programmes (also skill-based pay or knowledge-ba sed pay) - Competency based pay using Broad banding

What Is Competency-based Pay? • Competency-based pay – Where the company pays for the employee’s range, depth, and types of skills and kn owledge, rather than for the job title he or she holds. • Competencies – Demonstrable characteristics of a person, including knowledge, skills, and behav iors, that enable performance.

Why Use Competency-Based Pay? • pay plans that aim for high-performance work system. • Paying for skills, knowledg e, and competencies is more strategic. • Measurable skills, knowledge, and competencies are the heart of any company’s perf ormance management process.

Competency-Based Pay in Practice • Main components of skill/competency/ knowledge–based pay programs: – A system that d efines specific skills, and a process for tying the person’s pay to his or her ski ll – A training system that lets employees seek and acquire skills – A formal compet ency testing system – A work design that lets employees move among jobs to permit work assignment flexibility.

Competency-Based Pay: Pros and Cons • Pros – Higher quality – Lower absenteeism and fewer accidents • Cons – implementation problems – Cost implications of paying for unused knowledge, skills and behaviors – Complexity of program – Uncertainty that the program improves produ ctivity

• Broadbanding – Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels. • Wide bands provide for more flexibility in assigning workers to different job gr ades. • Lack of permanence in job responsibilities can be unsettling to new employ ees.

Trends in Executive Compensation • The Executive Pay Package – Base salary – Short-term incentives or bonuses – Long-term incentives or stock plans – Perquisites (perks)

Why are they made more? • Supply is short • Most important to organization in terms of their competencies • Mo tivation and retention

Executive Compensation: Ethics and Accountability • Incentive payments are excessive compared with return to stockholders. • Time peri ods for judging and rewarding performance are too short. • Subjective in nature • Em phasis is placed upon equaling or exceeding executive salary survey averages. • Benefits do not relate closely to individual performance.

The “Sweetness” of Executive Perks • Company car • Company plane • Executive eating facilities • Financial consulting • Compa ny-paid parking • Personal liability insurance • Estate planning • First-class air tra vel • Home computers • Chauffeur service • Children’s education • Spouse travel • Physical e xams • Mobile phones • Large insurance policies • Income tax preparation • Country club membership • Luncheon club membership • Personal home repairs • Loans • Legal counseling • Vacation cabins

Remedial • Conscious efforts must be made by organization to increase the supply • Participat ive management must be encouraged • Income beyond a limit must be subject to highe r taxation • Remuneration committees must be constituted

Negotiation Collective Bargaining • The term extends to all negotiations that take place betwe en an employer, group of employers or one or more employers’ organizations on the one hand, and one or more workers’ organizations on the other to • Determine the wor king conditions and terms of employment and / or • Regulate relations between empl oyer and employee/workers and / or • regulate relations between employer organizat ion or employee/workers organization

Collective bargaining and stakeholders • Concerned parties during the process of negotiation are The government The emplo yers/ management The workers/trade unions The consumers/ community

Negotiation techniques and skills • Negotiation is the process in which two or more parties who have common and conf licting interested come together and talk with a view to reaching an agreement • I t involves 5 key activities - Obtaining substantial results - Influencing the ba lance of power between parties - Influencing the atmosphere - Influencing the co nsistency - Influencing the procedures

Negotiation results • • • • Win-win Lose-win Lose-lose Win-win

Legal framework for payment of salary in INDIA • • • • Payment of wages Act, 1936 The minimum wages Act, 1948 The payment of Bonus Act, 1965 Equal remuneration Act, 1976

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