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Subject

Assignment No.
Discipline
Term
Submitted By
Examination Roll No.

Wages & Compensation


01
M.B.A. (Executive)
IV
Samiullah Khan
056

ASSIGNMENT QUESTIONS
Q.1: Meaning of rewards and incentives, Features of the incentive plan,
Determinants of incentives?
Q.2: Classification of rewards and incentives, Classification of incentive scheme,
Wage incentives: objectives of wage incentive scheme?
Q.3: Definition and paradox of downsizing, Reasons for and merits/demerits of
voluntary retirement scheme, Nature, determinants and variable related to the
selection of the most appropriate (PFP) system?
Q.4: Meaning of Compensation and Rewards, Types of Compensation and
Rewards, Importance and purpose of Compensation and Rewards, Principles of
sound, compensation and Rewards Administration?
Q.5: The Concept of Wage Levels and wage Rate, The Concept of Wage
Structure, Determinants of the Wage Structure?

Q.1: Meaning of rewards and incentives, Features of the incentive plan,


Determinants of incentives?
Rewards and Incentives
Rewards and incentives in the workplace have benefits for both employees
and employers. When recognized for stellar performance and productivity,
employees have increased morale, job satisfaction and involvement in
organizational functions. As a result, employers experience greater efficiency

and an increase in sales and productivity. Through workplace rewards and


incentives, employers and workers enjoy a positive and productive work
environment.
Monetary
Monetary incentives reward workers for performance and productivity
through money. These incentives include employee stock options, profit
sharing plans, paid time off, bonuses and cash awards. Additional monetary
incentives include annual or semi-annual bonuses, such as mid-year and
end-of-year rewards. These incentives encourage friendly competition
between associates when linked to job performance. Monetary rewards
motivate employees to produce optimally.
Non-Monetary
Non-monetary incentives reward employee performance through perks and
opportunities.

These

rewards

include

flexible

work

hours,

training

opportunities and the ability to work independently. The rewards and


incentives are valuable to an employee because they allow workers to learn
new skills and pursue advancement opportunities. For example, a recent
graduate may view an exemplary training program within an organization as
more valuable than a higher base salary because he feels the learning
opportunity will benefit his career.
Employee Recognition
Employees who receive recognition for their work accomplishments tend to
have

increased

morale

and

positive

workplace

attitudes.

Employee

recognition is an incentive employers utilize to offer feedback and


encouragement to employees. Employee recognition rewards include verbal
praise, award ceremonies and public announcements for a job well done.
Workplace recognition rewards occur frequently such as at the end of the
day, week or at the conclusion of the sales month.
Employee Assistance

Many employers offer rewards and incentives through employee assistance


programs. These programs help workers maintain a balance between work
and home life by supporting workers' mental and physical well-being. For
example, many programs provide counseling services to help cope with
stress, family issues and substance abuse. Employee assistance programs
also offer discounts to join fitness centers to encourage an active and
healthy lifestyle. Some programs help working parents find daycare and
other activities for their children. The purpose of these programs is to
support workers with their home responsibilities so they can remain focused
on their jobs while they are at work. Small businesses can contract with an
employee assistance firm to provide the services that workers need.
Key features of successful incentive programs
We all agree that incentive programs are put in place to both motivate and
retain staff.
Theres a balance to be struck between motivation and retention, some of
which was covered in the previous article in this series, The Challenges (and
Nightmares) of Maintaining Incentive Programs. But a successful incentive
program will ultimately seek to motivate new and existing staff, improve
long-term staff retention, and thereby increase the stability and performance
of the organisation over time.
The first point Id make here is that any incentive program needs to be
achievable. This may seem obvious, but too often Ive seen otherwise well
managed, well-structured incentive programs fail because they were or at
least were perceived to be unattainable.
Incentive programs should also be equitable. Staff know that if they do well,
theyll be rewarded, but also that bonuses and incentives are not a given;
they need to be earned. This should be the case whether youre a rep or a
manager.

A key feature of any successful incentive program is clarity on what an


employee needs to do to qualify, and which factors are in or out of an
employees control. For example, while an employee can and should be
able to control his or her own sales performance and execute their activity
plans, other factors, such as total company performance, can be a partial
determinant of the final incentive outcome.
Sometimes these external factors can account for 15% or more of the
outcome, and so, no matter what your position in the organisation, you want
to know what is directly within your control as well as indirect factors (such
as subjective individual performance assessments and total company
performance) that the whole organisation is striving to achieve.
In doing so, an equitable incentive program will seek to find the right balance
between

objective

(results)

and

subjective

(appraisal)

factors.

Often

subjective factors can have a significant effect on the final reward, so its
vital that employees understand how these subjective factors are measured,
who measures them, and what their direct relationship is to that person or
persons.
That said, no matter the weighting of factors or balance of control, an
incentive programs goal must be achievable. For example, an incentive
program that requires you to achieve 130% of your target in order to qualify
would be considered by most people unattainable, and would be more likely
to cause a mass walkout than motivate your staff to try harder.
The objective and subjective factors of an equitable incentive program must
be within reach of the individual. Large teams in particular will often have a
spread of achievers, from low to high. Those that go above the mark need to
know theyll be appropriately rewarded for their efforts, and those that
struggle to make their mark need to know there are systems (such as catch-

up or claw back programs) in place to help them make up the shortfall over
longer periods.
In most organisations theres an entry point below which no one receives a
bonus, for example, less than 8590% of target. There is then a sliding
upwards scale up to 100%, and beyond 100% theres usually an exponential
multiplier, usually capped at 130%. In this way you need to show a certain
flair for the role to achieve reward, but the company is protected so that you
cant go too far beyond whats realistically attainable (and affordable) to the
organisation.
While were on the subject of clarity and equitability, any qualification or
entry points to an incentive scheme must be clear. Not only does everyone
need to know the weighted qualification points of the scheme, but they also
need to be clear on eligibility to participate in the program. For example,
most organisations have a probation period (up to six months in some cases)
before which entry to an incentive scheme is closed or limited. Importantly
this needs to be clear for new starters as well as people changing roles inside
the same organisation (eg: a Sales Rep moving into a Manager role),
especially where different departments are governed by different schemes.
For new starters there is always some trepidation regarding what type of
territory they have inherited, often referred to as the carry-over effect,
where a new employee joins a company in a territory or market thats either
over-performing or under-performing. An employee may have inherited a role
where momentum is already in place and performance all but assured
whereas others may face market share saturation with limited opportunities
for growth. This is often considered a factor outside the employees control,
but at the same time can work to his advantage or disadvantage and may
result in discretionary incentive adjustments.

Remember that people are not looking for the same target, but a fair target
that reflects the opportunity within their sphere of influence. An incentive
goal should be based on logic and be auditable and explainable by both the
rep and management.
Communication is key to managing a fair and equitable incentive program,
as is transparency. People need to know that if theyve had a bad quarter
or cycle, that catch-up programs are available.
In summary, an incentive scheme that doesnt take any of these factors into
account and does not motivate personnel to achieve their best is likely to
result in unhappy staff, and a company with high staff turnover. Conversely,
a fair, equitable, transparent and achievable incentive scheme is critical to
motivating and retaining employees and driving business growth.
Incentive Differential Plan
An incentive is something that motivates an individual to perform an
action. The study of incentive structures is central to the study of all
economic activities (both in terms of individual decision-making and in
terms

of co-operation and competition within

larger

institutional

structure). Economic analysis, then, of the differences between societies


(and between different organizations within a society) largely amounts to
characterizing

the

differences

in incentive

structures faced

by

individuals involved in these collective efforts. Ultimately, incentives aim


to provide value for money and contribute to organizational success
Most governments impose a minimum wage, which is the minimum that
an employer may pay an employee. The purpose of the minimum wage
is to enable unskilled workers to earn a living.
Many economists are critical of the minimum wage because, as they
argue, it reduces total employment some workers benefit from the

higher wage while others are unemployed because of reduced demand


for the higher-priced labor. Moreover, many of the people who benefit
from the minimum wage are often people who do not need to maintain
their own living, such as teenagers who still live at home. Indeed, many
of these teenagers live in middle class households.
However, others argue that the minimum wage is so minimal that it has
little effect on actual employment and that the minimum wage helps to
reduce turnover, which helps to reduce the employer's cost of training
new employees. If employers paid as little as possible, then workers
would continually search for higher paying jobs.
The consensus seems to be that the benefits of the minimum wage
outweigh its drawbacks, especially since increases in the minimum wage
have not had a measurable impact on the level of employment.
Occupational Wage Differentials
Obviously, certain occupations pay more than others. Surgeons make
more than teachers, who make more than retail salespeople. Most of
these wage differentials are the result of educational and training
requirements, what is often referred to as human capital. Surgeons
require more than a decade of education and training after high school
before they can earn a living as surgeons, while retail salespeople can
get a job right of the high school, or even while they are still in school.
Education and training limit the supply of labor in that they take a certain
amount of time to complete and require a certain level of skill. In many
cases, people who attend college or training school do not have the time
to work a full-time job. Therefore, they also incur an opportunity cost
which is equal to the amount of money that they could have earned had
it not been for the educational or training requirement.

Another primary factor that determines wages is the demand for the
worker, which is a derived demand for the product or service that the
worker provides. If the worker provides a product or service that is highly
desirable, then a higher wage will prevail for a given supply of workers
who could do that job.
Sometimes, ability makes a very large difference in wage potential that
far outweighs the differences in ability. The winning horse earns a lot
more than the one that comes in 2nd even though it is only a little faster.
There are only so many jobs for professional athletes, so only the very
best are going to be chosen for those high-paying jobs. Likewise, only the
best musicians or those producing the most desirable music will become
wealthy. People only have so much time and money for entertainment,
so they tend to select entertainment performed by the best people,
especially entertainment package for mass consumption.
Compensating Differentials
Some jobs pay more because they are less desirable. They may be
hazardous, dirty, and employment may be sporadic or seasonal. For
instance,

construction

pays

more

than

retail

sales

because

of

these compensating differentials, which are nonmonetary differences


between jobs where higher or lower wages are paid because of
differences in the desirability of the job itself. Most retail jobs take place
in air-conditioned or heated stores where the worker can wear nice
clothing, stay clean, engage in friendly conversations with customers,
and expend little physical effort. By contrast, construction workers may
perform hazardous work, will become dirty during the job requiring them
to spend additional time cleaning up afterwards, and will often have to
work long hours to get the job finished, and they may not get work
during the winter months. Hence, to attract enough workers to
construction, the industry has to pay more.

In many cases, status or power, or the lack thereof, may also be a


compensating differential. After all, you never hear a kid saying I want to
grow up to be a garbage collector. On the other hand, much more money
is spent to elect someone to the presidency of the United States than
they will ever earn at the job, and many lawyers make more than
Supreme

Court

justices,

yet

few

lawyers

would

turn

down

an

appointment to the Supreme Court.


Wage Differentials Due to Locality
For any given type of job, wages are usually higher in one locality than in
others. Much of this difference is because of differences in the cost-ofliving. However, most people are reluctant to move because they do not
want to leave their friends, sell their house, be subjected to the cost and
uncertainty of a new job in a new community, and the children may not
want to change schools. People may also be unwilling to give up pension
plans, health insurance, or seniority at their current job. Hence, wage
differentials in different localities may persist, even if people know that
higher wages can be earned elsewhere.
The requirement for occupational licensing may also be an impediment
to moving to a different area for higher wages. Many occupations require
state licensing, such as law and medicine, so if a licensed worker wanted
to move to a new state, she would have to obtain a new license and may
have to satisfy additional requirements.
Wage Differentials Due To Market Imperfections
In economics, there is a presumption that people will migrate to higher
paying jobs from lower paying jobs of the same type and with the same
requirements. However, this can only happen if people know about the
jobs. People tend to look for jobs in their own locality by searching the
local newspaper or local Internet listings. Moreover, many people get

jobs from their network of friends and acquaintances, who tend to live in
the same area. Hence, the lack of information can lead to persistent
differences in wage differentials for the same type of job.
Performance Pay
Many occupations pay a wage rate that is commensurate with
performance, such as sales or managerial occupations. The purpose of
performance pay is to attract the most highly qualified and productive
workers, or as economists like to say, workers with highest marginal
revenue productivity.
Performance pay is also used to motivate workers to work. Many
employees paid a flat wage rate often linger or dawdle, which lowers
their productivity and the employer's marginal revenue product.
Dawdling employees can also lower morale, since harder working
employees resent being paid the same as the dawdling employees.
Performance pay helps to solve this principal-agent problem by
aligning the interests of the employees with that of the owners of the
firm both want to make more money.
There are various types of performance pay. Piece rates are paid
according to the amount of work accomplished. Many factories use piece
rates to prevent dawdling.
Commissions are often paid as a percentage of sales, in such industries
as real estate, insurance, securities, and retail sales.Royalties are paid
to artists who actually create a product and, like commissions, is usually
a percentage of the sales price of the product. For instance, authors may
receive 10% of the price of a book for each book that they sell.
Bonuses and stock options are often paid to executives of the company
so

that

they

work

harder

to

ensure

that

the

company

will

succeed. Bonuses are lump sum payments which are often paid at the
end

of

the

year

after

the

employee's

performance

can

be

assessed. Stock options align the interests of executives of the


company with those of the shareholders if their shareholders profit,
then they will too. Profit-sharing plans are often used to pay a
percentage of the firm's profits to employees so that they work harder.
Firms may also pay efficiency wages, which are higher than market
wages, to attract more productive workers. Efficiency wages may lower
the firm's cost of labor by hiring only productive individuals and lower
turnover,

which

can

result

in

more

experienced

workforce.

Consequently, recruiting and training costs are also lower. Good


employees also require less supervision and monitoring.
Drawbacks to Pay Incentives
There are some drawbacks to incentive pay:

Piece rates may result in sloppy work as workers rush to make more
money.

Commissioned salespeople often exaggerate claims, or even lie, to


make a sale, and oftentimes, the product is not in the best interest of
the customer.

Bonuses may disrupt teamwork and cause envy among coworkers.

Because profit sharing plans apply to all workers at a firm, less


productive employees will receive the same pay incentive as more
productive ones, which may cause resentment by the productive
workers and anger that they are not making as much money as they
could be, since how much they are ultimately paid depends on how
hard the others work.

Q.2: Classification of rewards and incentives, Classification of incentive scheme,


Wage incentives: objectives of wage incentive scheme?
Some of the most important types under which the wage incentive plans for
workers can be broadly classified are: 1. Financial Plans 2. Non Financial
Plans.
It is an inducement or a reward which is normally given to a worker for his
efficiency and hard labour. Incentives motivate and encourage workers for
raising their performance. They are induced to work more by offering them
higher wages. Incentive is in addition to the piece rate and is in some
combination of time and piece rate systems.
In most of the wage plans, workers/employees were guaranteed minimum
wages for time spent in working and extra wages for showing better
performance/ results. The incentive may be for increasing production beyond
a certain level of the products etc. These techniques benefit both the
employees and employers. The former get more wages and the later are
benefited by reducing the overhead costs per unit of output.
Broad Classification of Wage Incentive Plans:
The wage incentive plans for workers can be broadly classified into financial
plans and non-financial plans.
1. Financial Plans:
Financial plans are classified into:
(1) Direct financial plans
(2) Indirect financial plans
(1) Direct financial plans:

In these plans, workers are paid in proportion to their output. These include
both individual and group incentive plans. In the individual incentive plan,
each worker gets the reward on the basis of his performance during the
period under consideration.
Group incentive plans are used when two or more workers work as a team on
an operation in such a way that the performance of one is dependent on the
performance of others. The workers are paid under these plans upon their
base rate and on the basis of performance of the group or team as a whole
for the period in question.
Individual incentive plans are preferred over the group plans since they are
easy to apply and are result oriented. If an individual worker/ employee puts
in greater effort, he gets more and if he shirks work he accordingly gets less.
(2) Indirect Financial Plans:
Under these plans, the amount of incentives or compensation is not related
to the amount of production. The employees are provided indirect financial
benefits. Organization policies such as guaranteed annual increments in
salary for satisfactory performance.
Equitable promotion policies, and relatively high fringe benefits fall in this
category of incentives. Benefits of such plans tend to decrease with the
passage of time employees take for granted the incentives given to them
and fail to recognize the importance of productivity in continuance of such
schemes.
2. Non Financial Plans:
These plans are generally connected with emotions of individuals. They
include things like spirit of competition, feeling of inclusion, gratitude, shame
of poor performance and some other factors which tend to encourage good

performance. However these incentives can only help to make the financial
incentive more effective.
Employee Incentive Programs reward exceptional employees for reaching
work goals, achieving milestones or simply doing a good job. These types of
programs

are

designed

to

offer

incentive

and

rewards

to

valued

employees. Employee Incentive Programs have proven very successful in


arousing motivation in employees and increasing the overall performance of
the company. An incentive program is a great way to show employees that
you value their input while at the same time increasing your businesses
potential.
Here are the top ten reasons your company needs an Employee Incentive
Program.
#1

Mutual

Rewards

An Employee Incentive Program is mutually beneficial. The employee feels


valued and motivated and is therefore more productive and committed. The
company reaps the benefits of a motivated, focused and loyal employee. The
results of Incentive Programs have a consistent theme. The companys
bottom
#2

line

increases

as

the

Increased

employees

productivity

peaks.

motivation

Many people find it hard to motivate themselves at work. This is a common


occurrence and one that has been significantly effected by Incentive
Programs. These programs motivate employees by offering rewards for
reaching targets and company goals. These come in many forms ranging
from cash to cars to holidays to gifts. The rewards are a great motivator but
what is more inspiring for the employee is that the company cares enough to

offer
#3

these
Increased

incentives.
company

morale

Rewards, incentives and recognition make for a happy, harmonious working


environment. Goal setting and targeting objectives helps with focus and
purpose. Employee Incentive programs offer all of these things and are
highly conducive to company morale. Increases in company morale help to
reduce
#4

absenteeism

and

Increase

overall

company

company

costs.
loyalty

Company loyalty is not something you can buy. However incentives for good
work and rewards for hard work go along way to securing commitment from
employees. Employee incentive programs show employees the company
values their input and their work. If an employee feels valued and
appreciated they are more likely to form an allegiance to the company.
#5

Increased

productivity

Incentive programs promote productivity in a number of ways. Employees


are offered incentives for reaching targets or for good work in general. These
incentives vary but the main aim is to encourage employees to work towards
company goals. With the promise of incentives and clearly defined targets
employees

#6

are

Increase

more

productive

objective

and

motivated.

achievement

Incentive Programs are a great way to reach targets and company objectives.
Using an Incentive Program employers can set realistic goals and reward

employees when the reach them. This is a great way to boost productivity
and

morale

while

#7

at

the

same

time

Reduced

achieving

company

company

goals.
costs

Overall company costs can be reduced as a result of an Incentive Program.


This cost can be measured in terms of reduced absenteeism, reduced
recruitment costs and turnover of staff. You will also see a significant return
on your investment via increased productivity and motivation within the
office. To further explore the cost of implementing an employee incentive
program please

click

on

#8

the

link

to

receive

Reduced

quotes.

Absenteeism

The bottom line with incentive programs comes down to the very simple fact
that people like being rewarded for hard work and a job well done. The
rewards are only part of the equation. Incentive schemes show employees
the company cares and appreciates the work they are outputting. If an
employee feels appreciated and has clear targets that result in rewards then
they

are

more

likely

#9

to

want

to

come

Team

to

work.
Work

Incentive Programs promote teamwork and foster an environment that is


conducive to success. Employees working towards rewards or targets will pull
together to achieve desired results. Teamwork increases efficiency and
creates

harmony

#10
Incentive

within

the

Decreased
Programs

foster

happy,

productive

workplace.
Turnover

working

environments.

Employees enjoying this kind of environment will be more likely to stay long
term. This means incentive programs reduce the amount of turnovers within
the company. The advantage of consistent staffing is that you are not
spending money on recruiting or training new staff. You are also able to
retain loyal committed employees with a vested company interest.

Q.3: Definition and paradox of downsizing, Reasons for and merits/demerits of


voluntary retirement scheme, Nature, determinants and variable related to the
selection of the most appropriate (PFP) system?
Delayering and the flattening of organizational hierarchies was a widespread
trend through the 1990s. Peters (1992) in the USA promoted .attening as an
organizational strategy and Keuning and Opheij (1994) promoted the
prescriptions in Europe. Despite these strategies and apparent structural
changes, the number and ratio of managers appears to have grown. This
paradox of managerial downsizing has not been adequately probed in the
literature. The predominant explanation, that there has been a myth of
managerial downsizing, is associated with Gordon (1996). However, this
debate has been shaped by the US experience and data. There is a need to
reassess the dynamics of the 1990s in relation to other economies. This
article focuses on a semi-peripheral economy, that of Australia. A study of
the population of firms over time is necessary in order to resolve the issues.
The article utilizes a comprehensive range of data, including several national
surveys and a longitudinal database of all larger private-sector firms in
Australia during the 1990s. The results indicate that the myth of managerial
downsizing must be rejected. There were dramatic effects on managers
through the course of the 1990s in larger Australian firms. The dynamics of
the process are analysed, tracking 4,153 firms across the decade and the
paradox explained. The theoretical implications are discussed.
voluntary retirement scheme

This mode has come about in India as labour laws do not permit direct
retrenchment of unionized employees.
Definition: Voluntary retirement scheme is a method used by companies to
reduce surplus staff. This mode has come about in India as labour laws do
not permit direct retrenchment of unionized employees.
Description: VRS applies to an employee who has completed 10 years of
service or is above 40 years of age. ?It should apply to all employees (by
whatever name called), including workers and executives of a company or of
an authority or of a co-operative society, excepting directors of a company or
a

co-operative

society.

It has to result in an overall reduction in the existing strength of employees. ?


The vacancy caused by voluntary retirement is not to be filled up. The
retiring employee shall not be employed in another company or concern
belonging to the same management. The amount receivable on account of
voluntary retirement of the employee does not exceed the amount
equivalent to three months' salary for each completed year of service, or
salary at the time of retirement multiplied by the balance months of service
left before the date of retirement on superannuation of the employee. It is
the last salary drawn which is to form the basis for computing the amount of
payment.
Most large public and private sector companies have implemented VRS in
recent years.
Pay For Performance (PFP) Systems
Pay-for-performance is by far one of the most popular forms of compensation
that employees can offer their workforce. But even with its popularity, the
question of whether or not it is the best way to compensate employees
remains. There are many ways to do it, but essentially pay-for-performance
compensation means that a form of measurement is established and goals

are set, then when employees meet a goal, they are compensated
accordingly. This could be a number based on the amount of sales during a
period of time, annual revenue, performance reviews or any number of other
measurements. In fact, one of the most significant considerations in whether
or not pay-for-performance compensation is the best idea for your business
is the type of incentive payment youre using.
The devil is in the details
The saying the devil is in the details has never been truer than when it
comes to pay-for-performance. While some companies have seen enormous
success, others have wasted time, energy and money trying to make it work,
and the difference almost always lies in the details. There are a number of
things to consider and they all play a part in how you formulate and execute
a pay-for-performance system, including the decision of whether or not its
the best option for your situation.
A significant portion of the success or failure of this compensation system
lies with who will be receiving the incentive pay. After all, the premise of payfor-performance is that employees are motivated to help the company
achieve success because they in turn are positively impacted. So the big
question is, will this new system motivate your employees? As you can
imagine, it all depends on how much an employee stands to gain, and those
whose base compensation is higher will naturally have the potential to make
more as a bonus. For those who only have the potential to earn an
insignificant amount, there is little motivation to go above and beyond.
Knowing this, its easy to see why those in management or executive roles
are more motivated to outperform than those in lower-level roles. However,
according

to

Towers

Watsons

Using

Targeted

Incentives

to

Drive

Sustainable Engagement, pay for performance is the fourth most important


driver of sustainable engagement for employees who have the possibility of
earning bonuses that are more than 15 percent of their base pay.

Another important factor to consider is what your goals or measurements will


be. The Institute for Corporate Productivity produced Tying Pay to
Performance, a report that revealed that top-performing companies said
their main motivation for offering pay-for-performance is to recognize and
reward high performers, while lower-performing companies reported that
their main motivation was to increase the likelihood of achieving corporate
goals. For pay-for-performance to work, the measurements must represent a
balance of both without being unachievable or insignificant. You must also
find which measurements work for your specific industry, business and
employee groups. For instance, one study showed that executives earning
bonuses based on earnings-per-share measures were more successful than
those earning bonuses based on total shareholder return. This is just one
example of how the specific details of your pay-for-performance system are
the deciding factors of whether or not its the best option for you. It may take
some research and experimentation to determine how to make it work for
your business, but it is a system that can be successful when implemented
the right way.

Q.4: Meaning of Compensation and Rewards, Types of Compensation and


Rewards, Importance and purpose of Compensation and Rewards, Principles of
sound, compensation and Rewards Administration?
Compensation and Rewards
Compensation may be defined as money received in the performance of
work, plus the many kinds of benefits and services that organizations provide
their employees. Money is included under direct compensation (popularly
known as wages, i.e., gross pay); while benefits come under indirect
compensation, and may consist of life, accident, and
health insurance, the emplyers contribution to retirement, pay for vacation
or illness, and employers required payments for employee welfare as social

security. A wage (or pay) is the remuneration paid, for the service of labour
in production, periodically to an employee/worker.
Wages usually refer to the hourly rate or daily rate paid to such groups as
production and maintenance employees (blue-collar workers). On the other
hand, Salary normally refers to the weekly or monthly rates paid to clerical,
administrative and professional employees (white-collar workers).
Types of Compensation
The operating companies need to develop a compensation package for their
employees depending on the size and type of business, employers may
choose to compensate their employees in a number of different ways.
Below is given the different types/methods of compensation:
1. Wages and Salaries
Although we use the terms wages and salaries interchangeably, in payroll
accounting, the two terms have different definitions Wages refers to the
earnings of employees whose pay is calculated on an hourly basis. Salary
refers to the earnings of employees whose pay is calculated on a weekly, biweekly, semi-monthly, or monthly basis.
2.Commissions
Sales commission plans vary greatly from company to company, but are
generally based on the dollar amount of sales made during a payroll period.
Commission income is considered the same as wages or salaries for
withholding and reporting purposes. Commissions are usually computed on a
certain percentage or commission rate. Some commissioned employees may
not be exempt from the minimum wage requirement. The employer must
determine the regular, hourly rate for each non-exempt salesperson during
the week and make sure this rate is at least equal to the current minimum
wage.
3.Piece-Rate Plan

Workers paid on a piece-rate plan receive a certain amount for each item
produced. Gross earnings equal the rate per item multiplied by the number
of items produced during the payroll period.
4.Combination Plan
Many businesses pay sales people both a salary and a commission. Such a
combination plan provides some regular income and offers an incentive for
superior sales.
5.Draws
Draws are often given to salespeople who work only for commission. A draw
is an advance given to a salesperson that will be collected when future sales
transactions are closed. Draws will be subtracted from a salespersons
commissions after any applicable taxes and deductions have been withheld.
The draw is subject to all payroll withholding taxes.
Other Types of Earnings
6.Bonuses
Businesses offer bonuses in many different ways. Some bonuses are based
on profitable operations of the business and are paid at year-end. A common
type of bonus may be offered to salespeople for selling a specific item.
Another type of bonus plan, one that may be part of an employment
agreement, pays managers if the yearly sales or profits reach a certain level.
7.Profit Sharing Payments
A profit sharing plan, like a bonus plan, can be structured in a number of
different ways. An employer may elect to pay cash to employees, give them
stock in the business, or set up a deferred compensation fund for retirement.
8. Other Taxable Forms of Compensation
Sometimes other payments to employees are required that are equivalent to
wages. These include non-cash fringe benefits, reimbursed expenses, sick
pay, supplemental unemploymentbenefits, and tips. As with any form of
compensation, these payments are subject to federal taxes.
9.Non-Cash Fringe Benefits
Non-cash fringe benefits must be included in an employees gross earnings.

Fringe benefits include the following:


Personal use of company cars
Free or discounted airline flights
Vacations
Discounts on property or services
Memberships in country clubs or other social clubs
Tickets to entertainment or sporting events
10.Reimbursed Expenses
Payments made to employees for travel and other necessary business
expenses are taxable only if:
1. The employee does not have to substantiate those expenses with receipts
or other documentation. The employer advances an amount to the
employee for business expenses and the employee does not return any
unused amount.
2. Travel and entertainment reimbursements, or other expense allowances,
paid to an employee under a non-accountable plan are also included as
wages. Under a non-accountable plan, the employee is given a certain
amount of money toward expenses, but does not have to substantiate
them or return any excess cash.
3. Under an accountable plan, travel advances paid to the employee prior to
travel in excess of substantiated expenses must be repaid to the
employer within a reasonable and specified period of time.
11.Sick Pay
In general, sick pay is any amount paid to an employee because of illness or
injury under a plan providing for such benefits. The amounts are disbursed
by the insurance
company or the employees trust, and are referenced as third party
payments.
12.Tips
In certain businesses, employees receive compensation in the form of
gratuities or tips. A tip is an additional amount from a customer for services

rendered. Bartenders and restaurant servers usually receive tips in addition


to wages. Hair stylists and taxi drivers also depend on tips as a major source
of income.
13.Supplemental Wages
Supplemental wages differ from regular wages only in that they may be
based on a different payroll period, computed on a different compensation
plan or rate, or paid at a different time than regular wages. In addition,
certain payments are, by their nature or timing, supplemental wages. Such
payments include retroactive pay increases, severance pay, bonuses,
commissions,

taxable

fringe

benefits,

awards

and

vacation

pay

on

termination. The distinction between regular and supplemental wages is


important because special rules apply to withholding on supplemental
wages.
14.Exempt Payments:
Compensation not considered wages includes sickness and injury payments
under a workers compensation law, and other payments that are likely to be
tax deductible such as qualified moving expense reimbursements.

Q.5: The Concept of Wage Levels and wage Rate, The Concept of Wage Structure,
Determinants of the Wage Structure?

Wage levels result from individual and collective negotiations between the
employees (and their representatives) with the management (and the
owners) of firms.
In public bodies, laws and negotiations decide wages. A government wanting
to cut public expenditure might try to freeze or reduce public wages,
whereas a stimulus-oriented policy might include increases.
Firms and organizations pay wages to employees usually depending on
working time and/or on results (production made or objectives reached).

Individual wage often depends on occupied position in the organization as


well as on education, cumulated experience and seniority. Wages for the
same job outside the firm may serve as a (conventional or mandatory)
reference point in wage-setting routines.
Wage differentiation is a widespread phenomenon: different occupations
and different industries pay working time at uneven rates. Even wage
segregation is common: certain jobs are "socially" attributed to a certain
gender or ethnicity, which in turn might strive to widen the jobs it is
"allowed" to perform.
Wage structure for occupations, industries and regions is subject to very
slow long-term change. Imitation of wage increase in other parts of the
country is a common force in action.
Wage rates for the same position can be different between "normal hours"
(e.g. 40 hours a week) and overtime, i.e. the hours exceeding regular
working hours. Usually overtime are paid better, as it occurs when the work
is performed during the night or festivities (e.g. Sundays). A part of the
remunaration can be linked to results, both on an individual and collective
term of reference.
Wages are changed at discrete intervals of time, often a year, possibly
within a multi-year perspective plan.
Wage dynamics are linked to the following main determinants:

1. the balance of strength between employees and employers,


which in turn depends on labor organization, solidarity and
effective
2.
3.

previous

mobilization;
and

current profitability of

employers;

labour productivity increases;

4.

sales

and employment perspectives;

5. shortage of workers or, more often, abundance of unemployed;


6. past and forecasted inflation trends;
The legal framework about industrial relations, including the right to strike
and its possible limitations, the type of trade union allowed or historically
prevailing, the number of working hours and (effective or ineffective)
limitations to child labour is very important for actual results in negotiations.
Legal requirements, like minimum wages, are important in many countries.
This in turn make the electoral process very important for wages, with
trade associations and trade unions (and their respective constituencies)
spending and organizing support to candidates in exchange for favourable
laws.
For certain jobs, international levels of wages and immigration may be
additional determinants, with a large pool of emigrants exerting downward
pressure on current domestic wages, on the one hand, and being the source
of international remittances, on the other.
More analytically, a firm's labour market can be purposefully separated
in internal market (within firm) and external market (in other firms and the
unemployed). Internal market is ruled by hierarchy (with different layers of
workers, some being at the fringe and other at the core of the firm, with all
degrees of low, middle and management strata) and put in motion with
career processes, together with firm-specific wage policy. To a certain
degree,

external

conditions

exert

only

marginal

role

in

internal

negotiations. In fact, employees have cumulated firm-specific skills, difficult


to find ready on the market. Seamless effective work requires mutual trust,
which in turn depends on stability of work for, at least, a core of employees.

By contrast, external market is relevant when employees choose a


voluntary dismiss for getting better conditions outside. When a relevant
turnover takes place, the management is possibly forced to choose another
wage policy.
The unemployed may

be

characterised

by

much

lower

wage

expectations than the employees and they are prone to more flexible
working conditions, but they lack competence and are often characterised by
lower productivity.
This analysis explains on the one hand, why a higher unemployment may
brake wages but also, on the other hand, why wages can grow even if there
exists unemployment.

Impact on other variables


Higher

wages

mean

higher income in

most

families;

thus

their consumption will usually grow as well.


Total consumption will depend on consumption attitudes of the other
families, in particular of whose income heavily relies on dividends.
Immigrants may save part of their income to send remittances home.
If total consumption grow, this will boost sales throughout the industries,
increasing productivity. This, in turn, is conducive to a further growth in
wages.
Through the Keynesian multiplier, income increase will be followed again
by consumption, giving rise to a positive feedback loop.
If sales do not increase enough and the share of labour costs on total
costs is large, which is not always the case, the increase in wages will be

reflected in an increase of labour cost per unit of output. This, however,


if the final markets are not very competitive, brings forth a very credible risk
of inflation, with the involved reduction of real income. A wages-prices spiral
will begin, with only nominal increase of both, keeping real things to a large
extent untouched (but provoking a lot of social conflict).
Increases in nominal wages will boost payroll tax revenue, thus, other
things equal, they will reduce public deficit.
On a more micro level, it is important to remember that wage level and
dynamics are a key feature for individualmotivation to work.
Long-term trends
Since GDP and work productivity have an upward trend as a general rule,
one could imaging the same for real hourly wages. Instead, many countries
experience a long-run stagnation if not even a fall, due to persistent weak
organised labour, uncapable of finding effective ways to attract and mobilize
workers, especially in small and medium-sized enterprises.
This dynamics might be hidden to the personal experience mostly because,
during the work life, there is a progressive increase of competence, possibly
accompanied by changes in the workplace, so that, individually, one sees his
own wage rise.
In certain countries, wage increase are concentrated in periods during
which they sharply rise.
Business cycle behavior
Individual personal negotiations will fix wages for a dispersed number of
persons with uncertain business cycle behaviour. Collective overlapping

negotiations will fix wages for one or more years in advance, making usually
them unresponsive to short-term labour market fluctuations.
Still, it is quite intuitive that a situation of full employment, healthy firm
performances and good perspectives will tend to raise wages. Recession,
with its gloomy perspectives for labour will tend to brake wage dynamics.
Even before nominal wages are adjusted to the labour market conditions,
recession usually shrink working hours, and especially overtime. This quite
automatically reduces workers' income and the weighted average of wage
rates.
If recession goes further, some firms will fire people. The sequence in
which fringe and core workers are fired will move the average wage rate in
that industry. If fringe workers are fired before the core, then this tend to rise
the average rate. Some core worker can however receive part of their wages
as bonuses from the economic conditions of the firm: this component will
usually go down or disappear as the latter deteriorates.
But falling nominal wages are powerful depressors of labour commitment
and productivity; they put a pressure on workers to leave the firm looking for
a better one, or even to emigrate if the situation is too bad in the whole
domestic economy.
In

short,

wages

are

moderately

pro-cyclical.

If

labour

is

weak, recovery periods may only unevenly impact wages. If, on the contrary,
labour is strong, higher productivity and profits and will be reflected in higher
wages. This may spread expansionary forces and allow the system to enter
in a booming phase. In this moment, an increase in minimum wages is very
effective in raising domestic demand (and tax revenue) without inflationary
pressures, as there is still room in the production capacity and investments
ramp up to widen it.

Weighted wage rates will go up as the expansion continues, since


overtime become more common (and they are better paid), to give place to
employment increases as the firm is sure that there will be demand for its
products for the foreseeable future (or at least the duration of the work
contract).
If wage pressures are too strong, inflation may rise. In a context lacking
different instruments, the central bank may decide to adopt a restrictive
monetary policy, possibly with a "soft landing" idea in mind. "Hard landing" is
a distinctive possible outcome, instead, with its recessionary developments.

THE END