HRM

Unit 5
Compensation Management
 Job Evaluation
• Definitions… • Job evaluation is the process of
determining the worth of one job in relation
to that of the other jobs in a company. • Is a
process of determining the relative worth of a
job. • An effort to determine the relative value
of every job in an organization. • A practical
technique to judge the size one job relative to
others.
• ILO definition “an attempt to determine and
compare demands which the normal
performance of a particular job makes on
normal workers without taking into account
the individual abilities or performance of the
workers concerned”
• It simply means…. Studying / analyzing the value,
importance, and necessity of a particular job…
Key factors considered for Job evaluation are:
• Volume of Responsibilities
• Output / deliverables
• General / Specialty
• Decision makers / decision followers
• Emerging needs of the company
 Objectives of Job Evaluation
• • To gather data and information relating to JD,
job specification and employee specifications of
various jobs in an organization.
• • To compare the duties, responsibilities and
demands of a job with that of other jobs.
• • To determine the hierarchy /rank based on jobs
in an organization.
• • To ensure equal wages are fixed to the jobs of
equal worth or value.
• • To minimize wage discrimination based on sex,
age, caste, region, religion etc.
 Methods of Job evaluation
Non-quantitative method
• Ranking method
1. Simple ranking method – jobs and the
employees who perform those jobs are ranked from
highest to lowest depending on their quality and
value to the organization.
2. Ranking the key jobs: - the evaluator has to
identify the key or representative jobs at the 1st
stage, rank the key jobs at the 2nd stage, identify
and rank all other jobs at the 3rd stage
3. Paired comparison: the evaluator ranks each
job in turn against all other jobs to be appraised,
so that a series of paired ranking is produced.
4. Single factor ranking method: the single most
important task to be performed in a job is
identified and compared with the single most
important task to be performed in other jobs.
 Quantitative method Point Method :
Point Method :
• It was introduced by Merrill R. Lott.
• The earliest approach for evaluating job based on
quantitative values.
• This method is analytical and quantitative bcoz the
component of the job is assigned a numerical value.
• aspects or parts of the job such as education and experience
required to perform the job are assessed and a points value
awarded.
• the higher the educational requirements of the job the
higher the points scored.
• The point method is usually seen as the most
reliable and valid evaluation method by
employees compared to more subjective
methods such as the job ranking method.
• The most well known points scheme was
introduced by Hay management consultants in
1951. This scheme evaluates job responsibilities
in the light of three major factors - know how,
problem solving and accountability.
 Advantages of Job evaluation
1. Reduction in inequalities in salary structure
2. Helps in selection of employees
3. Harmonious relationship between employees
and manager
4. Standardization
5. Relevance of new jobs
 COMPENSATION
• Compensation Management is designing and
implementing total compensation package with a
systematic approach to providing value to
employees in exchange for work performance,

• 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.
✓It refers to monetary benefits offered and
provided to employees in return of the services they
provide to the organization.
✓The monetary benefits include basic salary, house
rent allowance, conveyance, leave travel allowance,
medical reimbursements, special allowances, bonus,
PF/Gratuity, etc.
✓They are given at a regular interval at a definite
time.
✓It refers to non-monetary benefits offered and
provided to employees in lieu of the services
provided by them to the organization.
✓They include Paid Leave, Car / transportation,
Medical Aids and assistance, Insurance (for self and
family), Leave travel Assistance, Retirement
Benefits, Holiday Homes.
The main central laws dealing with payment of
wages and salaries are given below:
• Minimum Wages Act 1948 : to provide for
fixing minimum rates of wages in certain
employments.
• Payment of Wages Act 1936 : regulates payment of
wages to employees (direct and indirect). The act is
intended to be a remedy against unauthorized
deductions made by employer and/or unjustified delay
in payment of wages.
• Payment of Bonus Act 1965 : to provide for the
payment of bonus to the persons employed in certain
establishments on the basis of profits or on the basis of
production.
• Payment of Gratuity Act 1972 : payment
made with the intention of helping an
employee monetarily after his retirement.
• Equal remuneration Act 1976 : provides for
payment of equal remuneration to men and
women and help prevent gender
discrimination.
• Statutory means "of or related to statutes," or what we normally call laws
or regulations. Compliance just means to comply with or adhere to. So
statutory compliance means you are following the laws on a given issue.
•
• The term is most often used with organizations, who must
• follow lots of regulations.
• When they forget or refuse to follow some of those regulations, they are
out of statutory compliance. A company that follows all the rules, is in
statutory compliance.
•
• Purpose-: Safeguarding the employees and the enterprise from un toward
risks by managing and consulting on issues such as retirement benefits
and Taxation
•
 Monthly salary components
• Basic Salary: The Basic component is the primary
component and the core of the salary structure. It is
the base income of an individual. It is a fixed part of
one's compensation package. A basic salary depends
on the employee’s designation and also the industry in
which the employee works.
• Dearness Allowance : Dearness Allowance: DA is a
living allowance paid to employees to tackle the effects
of inflation. It is applicable to government employees,
public sector employees, and pensioners only.
• HRA or House Rent Allowance: It is an amount
paid out to employees by companies for
expenses related to rented accommodation.
• Leave Travel Allowance (LTA): LTA is the amount
provided by the company to cover domestic
travel expenses of an employee. It does not
include the expenses for food, accommodation,
etc. during the travel.
• Conveyance Allowance: This allowance is
provided to employees to meet travel expenses
from residence to work.
 Characteristics of Best compensation
Plans
• 1. It must be simple to understand.
2. There should be equal work for equal pay
3. It should offer minimum wages to workers and incentives
for good performance
4. It should attract and train people in the organization.
5. It should motivate workers to contribute their best to
organizational goal by linking Wages with output
• 6. It should satisfy lower and higher-order needs of
the employees.
7. It should maintain balance and harmony amongst
managers and workers. Confects should be reduced.

• 8. It must be consistent with what competitors are

paying to their workers.
9. It should be consistent with cost of living.
• 10. It should have incentive schemes so that
workers who excel in their performance earn
more than their fellow workers.

• 11. It should have scope for promotions and pay

hikes.

12. It must be bases on merit and job

evaluation of workers.
 Purposes of Compensation
Compensation may be used to:

• recruit and retain qualified employees.

• increase or maintain morale/satisfaction.
• reward and encourage peak performance.
• achieve internal and external equity.
• reduce turnover and encourage company loyalty.
• modify (through negotiations) practices of unions.
 What are the components of a
compensation system?
• Job Descriptions A critical component of both
compensation and selection systems, job descriptions
define in writing the responsibilities, requirements,
functions, duties, location, environment, conditions, and
other aspects of jobs. Descriptions may be developed for
jobs individually or for entire job families.
• Job Analysis The process of analyzing jobs from which job
descriptions are developed. Job analysis techniques include
the use of interviews, questionnaires, and observation.
• Job Evaluation A system for comparing jobs for the purpose
of determining appropriate compensation levels for
individual jobs or job elements.
•
• Pay Structures Useful for standardizing compensation
practices. Most pay structures include several grades with
each grade containing a minimum salary/wage and either
step increments or grade range. Step increments are
common with union positions where the pay for each job is
pre-determined through collective bargaining.
• Salary Surveys Collections of salary and market data. May
include average salaries, inflation indicators, cost of living
indicators, salary budget averages. surveys may be
conducted within a specific industry or across industries as
well as within one geographical region or across different
geographical regions.
• Policies and Regulations
Factors Affecting Compensation
• Internal factors:

• Ability to Pay: The prosperous or big companies can pay

higher compensation as compared to the competing firms
whereas the smaller companies can afford to maintain their
pay scale up to the level of competing firm or sometimes even
below the industry standards.
• Business Strategy: The organization’s strategy also influences
the employee compensation. In case the company wants the
skilled workers, so as to outshine the competitor, will offer
more pay as compared to the others.Whereas, if the company
wants to go smooth and is managing with the available
workers, will give relatively less pay or equivalent to what
others are paying.
•
• Job Evaluation and Performance Appraisal: The
job evaluation helps to have a satisfactory
differential pays for the different jobs. The
performance Appraisal helps an employee to
earn extra on the basis of his performance.
• Employee: The employee or a worker himself
influences the compensation by performance,
experience and potential.
• External factors :
• Labor Market: The demand for and supply of labor
also influences the employee compensation.
• Going Rate: The compensation is decided on the
basis of the rate that is prevailing in the industry, i.e.
the amount the other firms are paying for the same
kind of work.
• Productivity: The compensation increases with the
increase in the production. Thus, to earn more, the
workers need to work on their efficiencies, that can
be improved by way of factors which are beyond
their control.
• Cost of Living: The cost of living index also influences the
employee compensation, in a way, that with the increase or
fall in the general price level and the consumer price index,
the wage or salary is to be varied accordingly.
• Labor Unions: The powerful labor unions influence the
compensation plan of the company. The labor unions are
generally formed in the case, where the demand is more, and
the labor supply is less or are involved in the dangerous work
and, therefore, demands more money for endangering their
lives.
• Labor laws: There are several laws passed by the Government
to safeguard the workers from the exploitation of employers.
 Statutory compliance
• Statutory compliance, in HR, refers to the legal framework
within which organizations must operate, in the treatment
of their employees.
• Every country has several hundreds of federal and state
labour laws that companies need to align with. This list is
forever being added to.
• A lot of your company’s effort and money goes into
ensuring compliance to these laws which could deal with a
range of issues; from the payment of minimum wages to
maternity benefits or professional taxes.
• Therefore, dealing with statutory compliance requires for
companies to be well-versed with the various labour
regulations in their country of operation.
• Purpose of Statutory compliance is
Safeguarding the employees and the
enterprise from un toward risks by managing
and consulting on issues such as retirement
benefits and Taxation..
•
 Statutory compliance for HR is : -
• Statutory Requirements For Minimum Wages
• This act provides for fixing minimum rates of wages for
skilled and unskilled laborers. It not only guarantees money
for bare minimum survival requirements of workers but
also takes care of education, medical requirements, and
some level of comfort of workers.
• The Minimum Wages Act being a state subject, the
statutory compliance of a centralized Payroll management
is to cater for the payment of minimum wages to an
organization’s workers spread out across different states.
• Payment of ‘Overtime’ wages to workers is also a statutory
requirement as per the Factory Act & Payment of Wages
Act. It affects sectors like manufacturing & construction.
• TDS Deduction
• Every employer who is paying salary to employees has to deduct
TDS under section 192 of the Income tax Act, 1961, if the salary is
more than maximum amount exempt from tax. The employers
need to generate Form 16.
• Form 16 The company issues a Form 16 which contains the details
about the salary earned by the employee and the amount of tax
deducted.
The taxpayer is required to submit Form 16 to file the Income Tax
returns every financial year. It acts as the proof of his/her income
and tax paid to the government.
• Some of the salary components that impact TDS deduction are:
HRA, Special allowance, Leave travel allowance, Children education
allowance, Medical allowance, Investments.
• Employees’ State Insurance Scheme
• ESI scheme is a contributory fund that enables
Indian employees to take advantage of self-
financing and healthcare insurance fund
contributed by the employee and the employer.
The scheme is managed by Employees’ State
Insurance Corporation which is a self- financing
social security and labor welfare organization. It
administers and regulates ESI scheme as per the
rules mentioned in the Indian ESI Act of 1948.
• ESI scheme applies to all establishments where 10 or more people
are employed. ESI fund provides cash and medical benefits to
employees and their immediate dependents.
• For ESI calculation, the salary comprises of all the monthly payable
amounts such as basic pay, dearness allowance, HRA, incentive
allowance, attendance bonus, meal allowance and special
allowance.
• The contributions under the ESI Scheme is raised from the
employees & employers. The rates of contribution, as a percentage
of wages payable to the employees are:
• Employees’ contribution 1.75% of the gross pay
• Employers’ contribution 4.75% of the gross pay
• Thus, 6.50% of the wages is to be paid as contribution to Scheme
for each worker
• Employee Provident Fund : is a compulsory contributory fund for
the future of employees after their retirement or for their
dependents in case of their early death. Provident fund is an
investment both by the employer and the employee each month,
the lump sum amount of which acts as an employee's retirement
benefits scheme.
• Provident fund contribution is mandatorily either of the following:
Case 1: Basic salary < 15000 (per month)
12% of the basic salary
• Case2: Basic salary > 15000 (per month)
In this case the company has an option to either contribute 12% of
15,000 (i.e. 1800) or 12% of Basic salary.
It is directly deposited in the employee’s PF account. Contribution to
the provident fund is mandatory for Indian companies.
• Professional Taxes: Professional tax is the tax charged by
the state government in order to let an individual practice a
certain profession. The maximum amount payable per year
is INR 2,500. It depends on one’s monthly salary and also
on the state in which one works. The professional tax levied
varies from state to state in India.
• Gratuity : Gratuity is the part of the salary that is received
by an employee from the employer for the services offered
by the employee upon him or her leaving the job. Though
an employee can receive the gratuity amount only after 5
years, it will be deducted by the employer every year and
hence it will get deducted from your CTC.
 Questions :
1. What is Remuneration? Explain the
Components of Remuneration.
2. What is Compensation ? What is the Purpose
of compensation
3. What are the Factors affecting compensation?
4. What is job evaluation? Explain various
methods of job evaluation.
5.Statutory reduction