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Compensation administration

Compensation administration is a segment of management or human resource management

focusing on planning, organizing, and controlling the direct and indirect payments employees
receive for the work they perform. Compensation includes direct forms such as base, merit, and
incentive pay and indirect forms such as vacation pay, deferred payment, and health insurance.
Compensation does not refer, however, to other kinds of employee rewards such as recognition
ceremonies and achievement parties. The ultimate objectives of compensation administration
are: efficient maintenance of a productive workforce, equitable pay, and compliance with
federal, state, and local regulations based on what companies can afford.

The basic concept of compensation administration—compensation management—is rather

simple: employees perform tasks for employers and so companies pay employees wages for the
jobs they do. Consequently, compensation is an exchange or a transaction, from which both
parties—employers and employees—benefit: both parties receive something for giving
something. Compensation, however, involves much more than this simple transaction. From the
employer's perspective, compensation is an issue of both affordability and employee motivation.
Companies must consider what they can reasonably afford to pay their employees and the
ramifications of their decisions: will they affect employee turnover and productivity? In
addition, some employers and managers believe pay can influence employee work ethic and
behavior and hence link compensation to performance. Moreover social, economic, legal, and
political forces also exert influence on compensation management, making it a complicated yet
important part of managing a business.

Rudimentary pay management has existed for as long as there have been employers and
employees. Owners of typically small, preindustrial businesses commonly weighed their ability
to pay against employee responsibilities and contributions in order to determine compensation.
The rapid development of corporations, multiplication of administrative hierarchies, and
specialization of jobs in the 20th century removed owners from the day-to-day evaluation of
jobs. Unionization brought a measure of standardization to wage labor, but neither the private
sector nor the federal government began to study systematic job evaluation until after World War
1. The federal government spearheaded the development of formal compensation administration
with the passage of the Federal Classification Act of 1923, which ranked government jobs and
set salary levels accordingly.

Milton L. Rock and Lance A. Berger, authors of The Compensation Handbook, credited human
resource professional Edward N. Hay with providing a foundation for 20th-century
compensation management. Hay began his work in the late 1930s, when his employer, a bank,
asked him to create a system of pay without ethnic, racial, or gender biases. He embarked on the
assignment by analyzing jobs—their duties, responsibilities, skills, education levels, etc.—and
composing descriptions based on his findings. Hay operated on the theory that "something that
can be measured has value while something that can't be measured has none." Accordingly, this
pioneer devised guide charts that systematically evaluated and ranked jobs according to several
variables: know-how, accountability, working conditions, physical effort, and problem solving.
The guide charts that bore his name would become the world's single most widely used job
evaluation technique. By 1943, when Hay founded his trendsetting consulting practice,
organizations throughout the United States (including the federal government) had
acknowledged the need for a consistent salary-administration system that would facilitate job
evaluation, ranking, and pricing.

During the period between the world wars, the American Management Association began to
compile descriptions of nonunion (especially clerical and blue-collar) jobs. Beginning in the
mid-1930s, the federal government's Employment Service enlisted its field offices throughout
the country to describe and codify jobs. The first edition of the resulting Dictionary of
Occupational Titles (DOT), published in 1939, contained about 17,500 summary definitions
presented alphabetically by title. Blocks of jobs were assigned five- or six-digit codes that
classified them in one of 550 occupational groups and indicated whether the positions were
skilled, semiskilled, or unskilled. This erratically published compendium became the "bible" of
the emerging compensation profession. It provided a foundation for systematic pay plans by
promoting internal classifications of jobs and later, external comparisons of jobs across

Mobilization of the domestic economy for World War II significantly advanced the
compensation discipline, both directly and indirectly. The war's technological advances helped
add 3,500 new occupations in the plastics, paper and pulp, and radio manufacturing industries to
the economy, and to the second edition of the Dictionary of Occupational Titles. The war era
also saw the imposition of governmental wage and price controls and guidelines. During the
"freeze," only companies with rational job evaluation plans could justify upward pay and benefit
adjustments. This requirement helped coerce some recalcitrant corporations into formulating
systematic pay plans. Since the controls on wages were more stringent than those on benefits,
labor unions lobbied for increased benefits and employers gladly capitulated. At the time,
generous packages of benefits were nontaxable and cost-effective for employers. Now-common
benefits such as pension plans, supplementary unemployment , extended vacations, and
guaranteed wages were added to the roster of statutory benefits that had included Social Security
(federal), workers' compensation, and unemployment compensation. Over the years, aggressive
unions negotiated an astonishing array of benefits, the administration of which fell to
compensation managers.

Most companies limited their pay analysis efforts internally until after the war. During the 1950s,
Hay and other human resource professionals joined the federal government in broader
examinations of compensation. The introduction of computers quickly and continuously
simplified and advanced the data collection, quantification, and storage processes. The resulting
databases have enabled survey analysts to thoroughly study relationships within and among
corporations, industries, and geographic regions.

Sunshine laws ratified in the 1970s combined with equal pay for equal work initiatives began to
usher in a new era for the compensation profession, as employees demanded explanations of the
rationale behind job assignments, remuneration, and opportunities, as well as employers' overall
capacity to pay. Over the course of the decade, pay administration evolved into a thoroughly
scientific and bureaucratic method, with its own technologies and rationalization methods.
The profession grew so systematized, in fact, that its precepts were considered nearly as inviolate
as natural law until the early 1990s. At that time, corporate downsizing, international
competition, and new management schemes compelled compensation managers to be more
adaptive to the changing needs of employers and employees. These shifts went to the heart of
wage and salary administration: job descriptions. As companies asked their employees to use
their competencies and skills to contribute to results in several ways, rather than just one easily
described way, the compensation administrator's tasks of job description and comparison have
grown more difficult and variable. One observer of these changes has characterized
compensation managers in this environment as "engineers" who apply established techniques as
situationally warranted. The basics of the discipline still apply, but they are adapted to each
corporate culture.

A pay program may include the following four components: base pay, wage and salary add-ons,
incentive payments, and benefits and services. Base pay refers to the cash that an employer pays
for the work performed. This base pay can be further delineated as either a wage or a salary.
Wages are hourly rates of pay regulated by the Fair Labor Standards Act of 1938. This federal
legislation formed the foundation of minimum wage, overtime pay, child labor, gender equality,
and record keeping requirements for U.S. businesses. Employees who are subject to the Fair
Labor Standards Act are known in compensation management parlance as "nonexempt."
Salaries, which are usually paid to managers and professionals, are annual or monthly
calculations of pay that usually have less relation to hours worked. Most (but not all) salaried
workers are "exempt" from the Fair Labor Standards Act of 1938.

Wage and salary add-ons include cost-of-living adjustments (or COLAs), overtime, holiday and
other premium wages, travel and apparel expenses, and a host of related forms of premiums and
reimbursements. Wage and salary add-ons are used to compensate employees for work above
and beyond their normal work schedules or to reimburse them for expenses related to their jobs.
COLAs are usually across-the-board contractual increases tied to an economic indicator, such as
the consumer price index, that reports an increase in the cost of living.

Incentive payments refer to funds employees receive for meeting performance or output goals as
well as to seniority and merit pay. Companies provide these forms of compensation to influence
employee behavior, improve productivity, and reward employees for their years of service or
their strong job performance.

Finally, benefits and services include paid time off, health insurance, deferred income such as
pension and profit sharing programs, company cars, fitness club memberships, child care
services, and tuition reimbursement. Social Security, workers' compensation, and unemployment
compensation are three legally required benefits. Since its initial passage in 1935, the Social
Security Act has been amended and expanded to protect workers and their families from losses
due to retirement, disability, and/or death. Employers, employees, and the self-employed make
contributions to the Social Security fund over the course of their careers. Workers' compensation
benefits have evolved from the early 1900s, when rising industrial accident rates prompted state
legislatures to action. All 50 states have enacted laws designed to compensate victims, minimize
accident-related litigation, reduce on-the-job accidents, and provide treatment and/or
rehabilitation where applicable. Unemployment insurance is designed to help workers through
the unexpected loss of a job. Employers pay the premiums for unemployment insurance in the
form of variable federal and state taxes. Workers who become unemployed and meet preset
eligibility requirements receive weekly benefits.

Benefits may also come in the form of protection programs, such as life and health insurance and
pensions and retirement plans. Group life insurance is one of the most widely offered benefits
because of its cost-effectiveness. Most employers shoulder the premiums for employees (and
sometimes retirees), but end coverage at employee termination. Group health insurance has also
become an expected component of benefits plans. Employers typically choose between five
prevalent systems: community-based, commercial insurance, self-insurance, health maintenance
organization, or preferred provider. Each of these systems has advantages and drawbacks, and in
an era of skyrocketing medical costs and impending federal and/or state supervision of the health
care industry, this aspect of compensation management has become evermore complex.

Pension and retirement plans include defined-benefit plans and defined-contribution plans. As
many as 80 percent of pension plan participants are the beneficiaries of defined-benefit plans. In
such a program, the employer promises a fixed pension level, either in terms of a dollar amount
or a percentage of earnings scaled to seniority. Defined-contribution plans specify the amount an
employer will set aside in an investment fund for the benefit of each employee. These plans have
grown increasingly popular in the 1980s and 1990s because employers know their costs up front,
employees can also contribute, and the funds can accumulate in a tax shelter. Employee stock
ownership plans (ESOPs) and 401(k) plans are the most popular defined-contribution plans.
401(k)s allow employers and employees to defer a maximum amount of annual compensation to
a tax-sheltered "savings account" that can then be invested on the employees behalf. ESOPs are
allocations of company-donated stock that can be used as retirement or incentive funds. Upon
retirement, a worker receives cash based on the value of the stock and seniority.


The interaction between 13 factors affects the actual pay rates employees receive, according to
Richard I. Henderson, author of Compensation Management in a Knowledge-Based World.
While each factor is straightforward when considered in isolation, it becomes far more
complicated when considered alongside the other factors. The 13 factors are:

1. Types and levels of skills and knowledge required.

2. Type of business.
3. Union affiliation or no union affiliation.
4. Capital-intensive or labor-intensive.
5. Company size.
6. Management philosophy.
7. Complete compensation package.
8. Geographic location.
9. Labor supply and demand.
10. Company profitability.
11. Employment stability. 12. Gender Difference. 13. Length of employment and job

A general model of compensation administration encompasses the creation and management of a
pay system based on four basic, interrelated policy decisions: internal consistency, external
competitiveness, employee contributions, and administration of the compensation program.
Compensation professionals work with these policy decisions according to individual
corporations' needs, keeping in mind the ultimate objectives of compensation administration—
efficiency, equity, and compliance. Companies develop their individual compensation strategies
by placing varying degrees of emphasis on these four policy decisions. This model of
compensation administration shows how companies consider most of the 13 factors previously
presented that influence pay rates.


Compensation managers seek to achieve internal equity and consistency—rationalizing pay

within a single organization from the chief executive officer on down—through the analysis,
description, evaluation, and structure of jobs. This policy requires compensation managers to
compare jobs or skill levels to determine the contributions employees with different job titles or
skill levels make toward accomplishing company goals. Compensation managers, therefore,
should consider internal consistency when determining pay rates for employees who do the same
work and employees who do different work. The objective of internal consistency is for
compensation managers to determine equitable rates of pay by considering the similarities and
differences in work content or job skills as well as the different contributions employees with
different jobs and skill levels make to a company's goals. The different values companies have
for employees with different jobs reflect the perceived importance of the various jobs or skill
levels to achieving company goals.

Internal consistency depends on how a company is structured—i.e., its hierarchy. Companies

traditionally maintained larger hierarchies with several levels, but the corporate restructuring
and reorganizing trend of the 1990s has resulted in flatter corporate structures with just a few
levels. The pay structure of a company is its range of pay rates for different jobs and skill levels
within the organization. In other words, pay structures reflect corporate structures. For example,
a company may have three organizational levels: executive, managerial, and professional. Each
of these levels may correspond to different pay rates. Hence, employees may have salaries of
$60,000 in the executive level, $45,000 in the management level, and $30,000 in the professional
level. The differences in pay among the various levels are called pay differentials, so the
differential between executives and managers is $15,000 and the differential between executives
and professionals is $30,000.
An emphasis on internal consistency forces employers to allocate pay fairly across a company's
levels. Consequently, a company with the pay and corporate structure outlined above would have
deemed it fair that executives earn twice as much as professionals, which seems reasonable in
that some companies pay their highest-paid employees 10 to 200 times as much as their lowest-
paid employees.

The number of levels and the degree of pay differentials are based on three general criteria: the
value of a job and a job's responsibilities, the skills and knowledge needed, and job performance
and productivity. Employers can use these criteria to modify employee behavior by indicating
what kinds of responsibilities, performance, productivity, skills, and knowledge employees need
to move into a different level and receive a higher pay rate.

More specifically, six primary but interrelated factors can shape a company's pay structure:

1. Social Customs: Beginning in the thirteenth century, employees began demanding a

"just" wage. This idea evolved into the current notion of a federally mandated minimum
wage. Hence, economic forces do not determine wages alone.
2. Economic Conditions: Demand for labor influences employee wages. Employers pay
wages based on the relative contributions employees make to production goals. In
addition, supply and demand for knowledge and skills helps determine wages.
3. Company Factors: Pay structures depend on the kind of technology a company has and
on whether a company uses pay as an incentive to motivate employees to improve job
performance and to accept more responsibilities.
4. Job Requirements: Some jobs may require greater skills, knowledge, or experience than
others and hence fetch a higher pay rate.
5. Employee Knowledge and Skills: Likewise, employees bring different levels of skills and
knowledge to companies and hence they are qualified to work at different levels of a
company hierarchy and receive different rates of pay as a result.
6. Employee Acceptance: Employees expect fair pay rates and determine if they receive fair
wages by comparing their wages with their coworkers' and supervisors' rates of pay. If
employees consider their pay rates unfair, they may seek employment elsewhere, put
forth little effort in their jobs, or file lawsuits.


Achieving external competitiveness in the area of compensation means balancing the need to
keep operating costs (including labor costs) low with the need to attract and retain quality
workers. External competitiveness is how a company's rates of pay compare to those of its

As Jeffrey Pfeffer argued in the Harvard Business Review, the distinction between two
compensation-related terms should preface the discussion of pay rates and competitiveness: the
distinction between labor rates and labor costs. Labor rates refer to the actual amount of pay
employees receive for a given period—e.g., a labor rate of $18.50 per hour. In contrast, labor
costs include the total amount paid to employees as well as the level of productivity.
Consequently, a company might have high labor rates, but relatively low labor costs if it has high
levels of productivity—i.e., if it takes fewer labor hours to complete tasks and if the quality of its
products and/or services is greater than the competition's. Therefore, compensation managers
should consider the effects pay rates will have on productivity and not consider pay rates alone
or confuse pay rates and labor costs.

Compensation managers achieve external competitiveness by comparing wage levels within their
industry, examining their companies' resources and goals, and establishing their own pay levels
accordingly. In general, companies can set their pay levels to lead, match, or follow competitors'
pay practices. Contemporary compensation policies include "variable pay," where pay levels
reflect the fluctuation of the firms' success or decline, and positioning as "employer of choice."
"Employer of choice" emphasizes the total compensation package, and may include employment
security, educational opportunities, and the promise of intellectual challenges or latitude. In
practice, some employers use different policies for different units and/or job groups.

Comparative surveys help compensation administrators correlate jobs and salaries across a given
industry and/or the entire economy. The U.S. Bureau of Labor Statistics conducts and publishes
three types of annual occupational wage surveys as well as the Monthly Labor Review. The
BLS's Area Wage Surveys examine occupations common to a broad range of industries in
hundreds of standard metropolitan statistical areas, providing a geographical basis for
comparison. The agency's industry wage surveys analyze nearly 100 manufacturing and service
sector industries individually. The BLS's National Survey of Professional, Administrative,
Technical, and Clerical Pay, which has been conducted since 1959, examines specific positions,
including accountants, auditors, attorneys, buyers, job analysts, directors of personnel, chemists,
engineers, engineering technicians, draftspersons, and clerical posts.

Job surveys have also been developed by professional human resource groups over the decades.
The New York-based American Management Association's "Executive Compensation Service"
has compiled and published information on compensation and related subjects since 1950. This
publication provides a means for measuring a company's compensation packages against those of
other companies.

Establishing the pay level balances a company's profit requirements with competition for
competent employees. Factors determining pay level include:

1. Competition in the labor market: the supply and demand for employees with various
2. Product market conditions: the degree of demand for specific products and the level of
industry competition.
3. Organizational characteristics: industry, management philosophy, size, and technology.

Weighing all these considerations, firms can choose to pay more than the industry average, and
therefore favor attracting and retaining quality employees, or pay less than their competitors'
average hoping to attract and retain employees through noncompensation means such as
recognition events, achievement celebrations, and working in a pleasant environment. A
competitive pay level—one that balances all considerations—can help contain labor costs,
enlarge the pool of qualified applicants, increase quality and experience, reduce voluntary
turnover, discourage unionization, and abate pay-related work stoppages. Once a company has
determined its pay level relative to its competitors, compensation managers must determine the
best compensation package for each occupation.


This policy area involves the weight companies choose to place on employee performance in
determining a compensation program. Some companies may choose to pay all employees the
same wage, while others decide to reward employees for seniority and productivity. Companies
that choose the latter route tend to emphasize incentive and merit aspects of compensation
programs. This approach enables companies to give their employees a measure of control over
their compensation and ideally thereby influence their performance. This policy assumes that
employees are significantly motivated by pay, which studies fail to confirm or refute
conclusively. Nevertheless, pay studies suggest that pay is one of several important employee
motivators, just not the consummate one. Compensation based on employee contributions
generally is distributed on the basis of employee evaluations.

In order to carry out evaluations perceived as being fair by employees, companies must establish
performance standards. To do so, companies should maintain a list of updated job descriptions
that indicate what aspects of employee performance will be measured for each job. The aspects
of employee performance to be measured should be reasonably attainable. Furthermore,
employees should participate in establishing standards and they should know the standards at the
beginning of the review period.

A performance evaluation may include objective and/or subjective measurements. Objective

assessments (such as number of pieces produced per hour, number of words typed per minute)
are clearly reliable and fair, although they may be more difficult to establish for some jobs.
Subjective measurement are problematic because of the potential for bias and because inaccurate
measurement can lead to employee frustration and apathy. Some objective methods of
compensation for performance have become very popular incentives in the late 20th century.
Perhaps the most common examples are sales commissions and piecework, but creative additions
to these staples have been added recently. Gain-sharing programs tie incentives to increased
productivity, quality improvements, and or cost savings. Profit sharing links pay to increases in
company profits, and employee stock option plans base increased compensation on a company's
stock performance. These programs are geared toward making each employee's vested interest in
the company clearer and more immediate through his or her paycheck. These concepts also help
control labor costs, because employees do not receive the rewards unless the company performs


The administrative policy refers to the tasks of compensation managers in designing and
implementing a pay program. Taking into consideration the previous three policies,
compensation managers must choose the components that they will include in a company's
compensation program—that is, which kinds of base pay, wage and salary add-ons, incentives,
and benefits they will offer employees with different jobs and skill levels. Administration also
involves determining whether the pay program will attract and retain needed employees
successfully, whether employees consider the pay program fair, how competitors pay their
employees and if competitors are more or less productive.

Compensation also must reinforce the organization's strategic conditions. Intensifying

competition in many industries has brought about shifts in overall corporate strategies and
changes in compensation. For example, Ford Motor Co. decided to emphasize customer service
in the 1990s as part of its marketing strategy. In order to encourage dealerships to shift their
focus as well, Ford had to change its incentive program. Whereas incentives had previously been
based strictly on sales, they began to relate to more customer-service-oriented goals.

Environmental and regulatory factors have also become very practical considerations of
compensation management. The increasing diversity of the workforce, for example, is one
significant trend. Compensation managers at E.l. du Pont de Nemours & Co., for example, have
promoted child care, flexible work schedules, career breaks, and other progressive benefits in
response to the needs of increasing numbers of women in its workforce. Compensation
management has been strongly influenced by regulatory pressures. From state and local payroll
taxes, to minimum wage legislation, workers' compensation, child labor laws, equal
opportunity mandates, and unemployment and social security requirements, pay administrators
wrangle with a daunting array of legal pressures. In all likelihood, the litany of regulations will
continue to grow. In the early 1990s, for example, outrage over excessive executive pay at
publicly owned companies prompted the Securities and Exchange Commission to require that
businesses disclose total executive pay and how that compensation relates to performance.

Companies also adopt different approaches to compensation administration responsibilities.

Some rely on a centralized approach where the design and administration of compensation
programs are performed by a single company department. Others opt for a decentralized
approach where multiple company departments have these responsibilities. The drawback to the
centralized approach is that a compensation program may suit general corporate needs, but not
individual department needs. Creating compensation task forces with members drawn from
various departments helps avoid this problem. Likewise, the decentralized approach also can lead
to problems. This approach may make it difficult to transfer employees from one department to
another and may bring about a lack of internal consistency.

Consequently, compensation administrators frequently adopt general guidelines that all

departmental compensation policies must follow, but allow departments to develop their own
policies, such as those for incentives, as long as they adhere to the general guidelines.
Ultimately, as Mircea Manicatide pointed out in HR Focus, a compensation program must" be
flexible enough to reflect the different needs of the individual and the organization; joint
investments in ongoing training; the ebb and flow of an employee's contributions without
creating expectations of permanence, and each employee's changing needs over time."

Read more: Compensation Administration - duties, benefits, expenses
Rewards and Incentives for Employees

Management is all about managing men. The main task of any manager in an
organization is to get things done through his subordinates. And to get things done,
motivating the employees and keeping their morale up is very essential. There are
a number of ways which different managers in organizations employ to improve
employee motivation, such as by treating the employees fairly, setting achievable
goals, giving positive reinforcement, following an effective discipline policy,
satisfying the employee needs and lastly, the most important of all, basing the
rewards or incentives on job performance. Although, all of the above methods of
motivating employees should be applied by a manager to increase work
productivity, yet special attention should be paid while deciding upon incentives for
employees, as nothing can motivate an individual like them

In simple words, financial incentives for employees are the amount of increment they will get
upon achieving a particular target, i.e. if an employee does A amount of work, he will get B
amount of money. Financial incentives are not the only types of incentives for employees, there
are companies which give incentives in the form of gift items or organizing events for the high
achieving employees as well. Many organizations these days give rewards to their high
performing employees in the form of books, gadgets, restaurant passes and movie tickets.
Throwing parties for employees or having events such as special dinners for the employees are
some of the other employee incentive ideas used by companies these days. Read more on
employee recognition gifts.

The incentives for employees, such as a rise in the salary of the high performing employee,
benefits the organization in two ways. Firstly, the employee who receives a pay hike gets even
more motivated and thus, maintains his high level of performance. Secondly, other employees
too get indirectly motivated to work harder in aspiration of receiving similar incentives.

Incentives may initially cost the organization some money, but if one looks at its overall and
long term benefits, i.e. high productivity translating in lower cost of production, the initial
amount spent by the organization on the various employee incentive plans will seem worth it.

Read more on:

• Employee Incentive Plans and Ideas

• Employee Appreciation and Recognition Ideas

Employee Incentive Programs

The motive of all employee incentive programs is to increase the productivity of the employees
and to help them enjoy their work. Employees who enjoy what they are doing are bound to work
better with the clients and also among one another. Although, employee incentive programs are
not a replacement for pay raises, but nevertheless they can prove to be quite effective. Read more
on performance appraisals.

Clear Communication

Neither reward, nor incentive can replace clear cut communication between the employees and
their managers. The work environment should be such that the employees can openly discuss any
work related issue with their managers. And if they have certain ideas on how to make their work
more efficient or productive, those ideas should be thoroughly discussed and even applied, if
found to be effective. Also, during the management meetings, certain employee representatives
should be included to show that the management does not have any thing to hide from its
employees. Read more on workplace communication.

Motivational Incentives for Employees

Before implementing employee incentive programs, a good idea is to make a list of all the
rewards that have been planned and make the employees vote the ones that they think are the
best for them. An organization can also consider the following incentives for employees.

• Staff meetings in a good hotel instead of office.

• A birthday program in which a gift is delivered to the employees house on his birthday.
• Attendance incentives for employees could be something like certificates with "time offs"
for the employee.
• Soccer game tickets or concert tickets to a group which has achieved its target.
• Certain health incentives for employees who do social work.
An employee stock ownership plan (ESOP) is a way in which employees of a company can own
a share of the company they work for. There are different ways in which employees can receive
stocks and shares of their company. Employees can receive them as a bonus, buy them directly
from the company, or receive them through an ESOP.

In the United States, ESOPs are a very common form of employee ownership. They have been
growing in strength since about 1974. Around 11,000 companies have an ESOP in place, and
nearly 8 million employees are involved in them.

Companies may establish an ESOP for a number of purposes. Most press attention regarding the
use of ESOPs focuses on their use as a takeover defense or as buyouts of failing companies.
These account for a very small percentage of ESOPs.

The main purpose of an ESOP is to reward and motivate employees. They are also used to
provide a market for departing owners of successful companies. In most cases, an ESOP is given
to an employee, rather than purchased by an employee.

An ESOP is similar to a profit-sharing plan. A company sets up a trust fund, into which it
contributes either new shares of its own stocks or cash to buy existing shares. Another version of
the ESOP borrows money in order to buy existing or new shares. In this case, the company
makes cash contributions to the plan in order to repay the loan.

Company contributions to the plan are tax deductible. Shares in the trust are generally allocated
to individual employee accounts. All employees over the age of 21 can participate in the plan,
and senior members of the workforce acquire an increasing right to the shares in their account.
This is known as vesting, and employees should be fully vested within five to seven years. Other
employee’s shares are based on relative pay or some other equitable formula.

When employees leave the company, they receives their share options, and the
company must be able to buy back these options. They must buy them back at their
full market value. In private companies, employees are able to vote their shares on
major issues such as relocation or closure. In public companies, employees can vote
on all issues.
Pay for performance compensation
Pay for performance compensation plans are win-win for employees and business owners. When
pay for performance salaries are properly implemented, everyone shares a common goal of doing
what's best for the company.

In addition to traditional wage and salary based compensation systems, basing an employee's pay
on their performance has also become popular.

Pay for performance, or P4P is a system in which employees attain increased levels of
compensation if their team, department, or company reaches specified targets. P4P has been
implemented as a motivational tactic and with an eye to persuade employees to work harder and
benefit the company while at the same time providing an added benefit for themselves.

As of 2005, approximately 75 percent of all businesses linked at least some part of employee pay
to performance.

Pay for performance compensation schemes initially gained popularity in health insurance,
rewarding different medical entities for reaching targets in quality and efficiency. It was widely
held that the implementation of this system would improve the quality of care administered and
bring the United States' healthcare system on par with some of the more venerable international
systems. The applications for P4P systems have recently extended far beyond the realm of
healthcare, as employers in many different industries are recognizing its merits.

Pay for performance compensation structures not only account for individual, but also account
for the working environment and performance of the team as well. This can be a valuable
benefit, as knowing that compensation increases will be based on the performance of the team
will coerce employees to operate as a cohesive unit in order to reach a common goal.

Typically, employers not on P4P systems hold compensation reviews, or simply provide their
employees with a set pay increase annually. When holding P4P performance reviews to
determine compensation bonuses, you must ensure that you can consistently and accurately
measure performance for all employees.

These measures may be different for people in different positions within the same company.
Performance metrics for a secretary will certainly be different for those of a financial analyst. By
surveying the responsibilities of people occupying various roles in your company, you can
effectively formulate performance metrics on which your P4P system will be based.

If a pay for performance compensation structure would help to benefit your business, make sure
to review the details of the system with your employees and establish guidelines for
compensation. By having a well-established policy in place, you can be sure that all of your
employees have a firm grasp of how the P4P system works, which will allow you to get the most
out of your employees.
Employee Welfare
Welfare includes anything that is done for the comfort and improvement of employees and is
provided over and above the wages. Welfare helps in keeping the morale and motivation of the
employees high so as to retain the employees for longer duration. The welfare measures need not
be in monetary terms only but in any kind/forms. Employee welfare includes monitoring of
working conditions, creation of industrial harmony through infrastructure for health, industrial
relations and insurance against disease, accident and unemployment for the workers and their

Labor welfare entails all those activities of employer which are directed towards providing the
employees with certain facilities and services in addition to wages or salaries.

Labor welfare has the following objectives:

1. To provide better life and health to the workers

2. To make the workers happy and satisfied
3. To relieve workers from industrial fatigue and to improve intellectual, cultural and
material conditions of living of the workers.

The basic features of labor welfare measures are as follows:

1. Labor welfare includes various facilities, services and amenities provided to workers for
improving their health, efficiency, economic betterment and social status.
2. Welfare measures are in addition to regular wages and other economic benefits available
to workers due to legal provisions and collective bargaining
3. Labor welfare schemes are flexible and ever-changing. New welfare measures are added
to the existing ones from time to time.
4. Welfare measures may be introduced by the employers, government, employees or by
any social or charitable agency.
5. The purpose of labor welfare is to bring about the development of the whole personality
of the workers to make a better workforce.

The very logic behind providing welfare schemes is to create efficient, healthy, loyal and
satisfied labor force for the organization. The purpose of providing such facilities is to make their
work life better and also to raise their standard of living. The important benefits of welfare
measures can be summarized as follows:

• They provide better physical and mental health to workers and thus promote a healthy
work environment
• Facilities like housing schemes, medical benefits, and education and recreation facilities
for workers’ families help in raising their standards of living. This makes workers to pay
more attention towards work and thus increases their productivity.
• Employers get stable labor force by providing welfare facilities. Workers take active
interest in their jobs and work with a feeling of involvement and participation.

Working conditions

Working conditions refers to the working environment and to the non-pay aspects of an
employee’s terms and conditions of employment. It covers such matters as the organisation of
work and work activities; training, skills and employability; health, safety and well-being; and
working time and work-life balance. Improving working conditions is one of the goals of the EU.
The ‘Social Chapter’ (Chapter 1: Social Provisions of Title XI of the EC Treaty) provides in
Article 136 EC: ‘The Community and the Member States… shall have as their objectives the
promotion of employment, improved living and working conditions, so as to make possible their
harmonisation while the improvement is being maintained…..’

The original EC Treaty of 1957 took a more narrowly economic view, following the
recommendations of two influential reports which were published in 1956 – the report of a
Committee set up by the Member States (the Spaak Report) and the report of a committee of
experts from the International Labour Organisation (the Ohlin Report). Both reports
recommended that there was no need for an interventionist social dimension for the proposed
common market, save for certain measures against ‘unfair competition’. The objectives of
improved living and working conditions were to be achieved primarily through the mechanisms
of the common market. Intervention was only to secure what was consistent with the common
market: the free movement of labour.

A revision of this policy was made at the summit of the Heads of the Member States in Paris in
October 1972, which concluded with the final communiqué that the Member States ‘attached as
much importance to vigorous action in the social field as to the achievement of economic union...
(and considered) it essential to ensure the increasing involvement of labour and management in
the economic and social decisions of the Community’. Accordingly, the Commission was
instructed to draw up a Social Action Programme (SAP). The three main objectives of the 1974
SAP were, first, attainment of full and better employment in the Community, secondly,
improvement of living and working conditions, and, thirdly, increased involvement of
management and labour in the economic and social decisions of the Community and of workers
in the life of undertakings. Progress towards these objectives took the form of a legislative
programme during the 1970s. The Council also established the European Foundation for the
Improvement of Living and Working Conditions in 1975 to undertake research into the new and
developing area of Community social policy, and to stimulate and provide the scientific basis for
the Community’s legislative initiatives. The Protocol on Social Policy of the 1992 Treaty of
Maastricht (Treaty on European Union), later the new Social Chapter of the EC Treaty, greatly
expanded the social competences of the Community to include, among other matters, ‘working
conditions’ (Article 137(1)(b)).
Changes in working conditions

Changes in working conditions and other aspects of the employment relationship can generate
serious industrial relations problems. One problem is that workers may not have precise
information about their working conditions in the first place. This was addressed by Council
Directive 91/533/EEC of 14 October 1991 on an employer’s obligation to inform employees of
the conditions applicable to the contract or employment relationship. As the Explanatory
Memorandum to the proposed directive put it, some workers ‘have neither a written contract of
employment nor a letter of appointment explaining the elements of the employment relationship
or referring to a collective agreement or any other easily accessible written document’ (COM
(90) 563 final).

The directive stipulates that the employer must provide information covering all ‘essential
aspects’ of the employment relationship. The employer is obliged to prepare a document with the
requisite information, and give it to the employee not later than two months after the
commencement of employment.

To maintain the directive’s objective of keeping the employee informed, a new document that
reflects anychanges in core working conditions will have to be issued.

The normal rule is that an employer cannot change the terms and conditions of employment
without the consent of the employee, when such modifications are outside the management
prerogative. So merely informing the employee by a written statement is not conclusive of the
existence of an agreed change in the terms. When the employer has not the right in the contract –
if he tries to alter rates of pay, hours of work, or the status or grade of the employee – he or she
must obtain the employee’s consent before the change can have any legal effect. The existence of
a written statement does not mean that it has been agreed and is thus binding.

If the employer unilaterally drafts the written information, challenges concerning the accuracy,
and hence validity, of the document purporting to comply with the directive’s requirements may
arise in the absence of any worker input to the document. This could be avoided if the document
itself cites a collective agreement as the source for changes in terms and conditions.