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Jagan Institute of Management Studies Rohini, Delhi-110085 PGDBM (4th Trimester) COMPENSATION MANAGEMENT Money brings honour, friends,

conquests and riches John Milton Introduction: To survive in a complex, competitive global economy, all organisations, private or public, must be able to focus on the effective and efficient delivery of the products they are designed to offer. A key factor in promoting effective delivery of essential goods and services is the provision of a performance-based remuneration system for all workers. Compensation Management provides a step-by-step approach for designing a remuneration system that recognises job requirements;employee-related knowledge and skills; and performance related incentives that link individual, team, work unit and organisational performance. Total remuneration also includes a host of benefits that protect and expand the lifestyle and health of workers and their families. The total of these contributions by the organisation represents its labor costs. On the one hand, these costs should contribute to improved employee performance and on the other hand, expanded productivity so that an organisation can be competitive and profitable in providing its goods and services within a global economy. Financial compensation is either Direct or Indirect. Direct Pay an employee receives in the form of wages, salaries, bonuses or commissions. Indirect Consists of all financial rewards that are not included in direct financial compensation. Ex. Vacation, insurance, child care services etc. Non-financial rewards like praise, self-esteem and recognition affect employees motivation, satisfaction and productivity.

Compensation Strategy
Develop a compensation program that recognises the lifestyle and standard of living of all employees. To develop a competitive advantage in a global economy, the compensation program of the organisation must support totally the strategic plans and actions of the organisation. For the human resources/ compensation specialist, the assignment to ensure accomplishment of organisational strategy begins with determining: 1. the work that must be performed by some work unit or individual, 2. the kinds and levels of knowledge and skill required, 3. the quality of people needed to promote organisational success,and

4. the rewards the organisation can offer to its members that promote a work culture that ensures accomplishment of oganisational strategy. The pay and reward system of the organisation must stimulate acceptable levels of performance from all employees. Money is the name of the game, but the distribution of organisational funds determines who wins the game Nature & Significance of Wage & Salary Administration Employers perceive wage as a cost and are keen to reduce labour cost per unit of output. Although they are inclined to save the cost, they have also come to realise that it would not be possible for them to attract and maintain an effective work force without compensating it adequately. Employees consider wage as a means for satisfying their needs in terms of an expected standard.

Wage and salary administration is the process by which wage and salary levels and structures are determined in organizational settings. Acc. to Beach, the four objectives of wage and salary administration system are: 1. Recruitment of people; form an effective measure to attract human resources for recruitment purposes in a competitive labour market. 2. Control of payroll cost; facilitates control of wages and salaries and labour costs. Management may take care to control the distribution and rate within a predetermined rate range and exert control upon the frequency and volume of pay increments. 3. Satisfaction: Seeks to maintain satisfaction of human resources reducing voluntary separations and complaints & grievances stemming from inadequate or inequitable wages, as perceived by the employees. It gives the feeling that the remuneration is fair and that no favouritism has been practiced in its payment 4. Motivation: The financial compensation system purports to induce and reward the improved performance and forms an effective motivator. Functions of Wage and Salary Administration Equity Function Motivational Function Equity Function Serves as a standard for evaluating the individuals past performance and current effectiveness. Relieves the individual from financial worries. Fosters devotion towards work.

Individuals tend to believe that the existing reward system of the enterprise provides them adequate compensation for the physical and mental efforts and contributions. Compensation is perceived as `Equitable leading to the formation of effective groups and reinforcement of desirable behaviour of participants to attain organizational goals. Motivational Function Serves as a motivator to future initiative. Differential increase of remuneration causes direct and proportional differential increase of efforts. Human motivation is a highly complex issue better to provide equitable rewards in the form of wages and salaries and partly by making them available opportunities for the satisfaction of higher needs integrating individual and organizational goals. Elements/ Issues in Wage and Salary Administration

Pay Levels Relate to the problem as to whether the wage structure is high, average or low ; determined by competitive labour market, industry, financial position of the enterprise, managerial policies etc. Internal pay structure Relates to the hierarchy of pay rates, pay grades and job classification and revolves around the job evaluation. Individual pay system revolves around seniority and merit. Payment by time relates to remuneration paid in terms of time spent on the job; While payment by output involves financial compensation in terms of units of output as indicated by wage incentive plans. Special problems of salesmen, managers and professionals relates to incentive plans, tax saving, fringe benefits plans and pay plans in terms of qualifications and performance as compared to pay plans based on the intrinsic job content for other personnel in the organization. Fringe benefits and pay supplements in the form of insurance, pensions, paid holidays, bonuses, profit sharing and allied factors are significant components is the compensation system involving substantial labour costs to enhance the attractiveness of a job. Control of wages and salaries exerted by several measures such as annual review of job classification, evaluation of incentive plans and careful budgeting of pay increases. Significance of financial compensation Individual standpoint Financial compensation is determinant of the status, prestige of the individual in the society. Enterprise standpoint While attempts are made to pay high wages or salary as required to attract, motivate and maintain competent human resources, simultaneously, stress is laid to keep them as low as possible to make profits

adequate enough to attract new capital, expand productive capacity and satisfy consumer needs. National standpoint National economy suffers a setback from frequent strikes and grievances in case of dissatisfaction stemming from lower wage rates. However, if wages tend to increase at a faster rate than the productivity of the individuals, it will jeopardize the entire economic mechanism of the nation. Philosophies of Wage Productivity Philosophy Purchasing Power Philosophy

Productivity Philosophy: 1. Employers should provide the best tools, machines, goods and buildings and management should provide the latest production techniques. 2. Production should increase and unit cost should decrease. 3. Market should expand leading to enhanced sales volume. 4. The enhanced profits should be used to increase the wages of the employees raising their standard of living while part of the remaining profit should be ploughed back to improve the technology. Purchasing Power: 1. Based on the viewpoint that purchasing power should be increased to attain national prosperity. 2. Workers should be paid high wages because they form a large proportion of the work force. 3. The effective demands for goods and services produced should enlarge in each establishment. 4. The productivity per worker should increase while the unit cost of output should decrease leading to enhanced profits. 5. The increased wages should be paid from this enhanced income to regenerate the cycle. The basic difference between these philosophies relates to the issues of time and approach. Usually the management holds that increased wages should follow increased productivity stressing increase in capital goods, while the labour unions hold that wage increases should precede productivity emphasizing the purchasing power of the workers. The productivity concept is believed to be more valid in the long run. Principles of Wages and Salary Administration

1. The enterprise should have a clear-cut plan to determine differential pay levels in terms of divergent job requirements involving varied skill, effort responsibilty and working condition. 2. An attempt should be made to keep the general level of wages and salaries of the enterprise in line with that obtained in the labour market or industry. 3. Distinguish people from the jobs. 4. Equal pay for equal work 5. Plan to adapt an equitable measure for recognizing individual differences in ability and contribution. 6. Procedure for handling wage grievances. 7. Inform the employees and the union about the procedure followed in determining wage rates. Criteria in determining wages in an enterprise 1. 2. 3. 4. 5. 6. 7. 8. Law of supply and demand Prevailing wages for the same category of workers in the same industry. Ability to pay. Governmental factors Standard and cost of living Productivity Bargaining power Job requirements indicating measures of job difficulty. Wage Differentials Several grievances and dissatisfactions with wages are the result of pay rate differences between jobs and individuals. Increased responsibility in supervisory position should accompany higher earnings. Attempts are to be made to maintain differentials between skilled and unskilled jobs. There may arise wage differentials in view of varying occupational proficiencies.

Unit I Theories of Wages Ascertain the levels and sources of wages. Considered as a demand and supply analysis. Wage is viewed as a price while the wage-structure a sub-system of prices. ECONOMIC THEORIES The Subsistence Theory: Deals with population rather than labour. Each member should be provided with sufficient food, clothing, shelter to continue to exist. When the income exceeds the subsistence level, workers respond by further procreation, thus increasing the labour force and consequently lowering the wages as a result of supply and demand. The theory has been rejected in view of the fact that with the increasing level of income, population is found decreasing rather than increasing. The Wages fund Theory: Wages were paid from fixed fund. Lump sum had been distributed equally among the workers obtained in the labour market. Based on short-run approach;has limited value as current funds can be employed for compensating the human sources. The Labour Theory of Value: Based on assumption that the value of a particular commodity is equivalent to the magnitude of labour involved in it. Labour deserved the partial value of the goods it produced. The Marginal Productivity Theory: Two men working together will produce more than two times as compared to the total amount when they produce separately. Thus initially each additional individuals contribution to the total output, would be more than the total production while one is working alone. At the point of Law of diminishing returns, the output of an additional individual will be less than the preceding one. The entrepreneur will employ additional individuals beyond this point until the cost or wage of the marginal or additional individual is equivalent to the marginal individuals output. The Bargaining Theory: Wages are determined by interaction of management and labour in a collective bargaining process. An effective basis for determining wages in the short-run. The Investment Theory: Asserts that individuals are paid in terms of their investment in the form of training, education and experience. Thus wages are determined in terms of what individuals `bring to a job.

The Supply and Demand Theory: If jobs are few and the supply of workers is high, then wages will fall and viceversa. BEHAVIORAL SCIENCE THEORIES Management practices critically influence the productivity of the organization and that internal managerial and compensation management practices must be recognized.

The X Efficiency theory: Recognised the influence of internal mgt. practices on organizational productivity. H. Leibenstein postulated that the actual output level of the firm seldom matched its competitive optimal level. The difference was due to internal operations. The Suboptimisation theory: Simon recognized that managers do not make optimal decisions; they suboptimise. Managers always act in the best manner but not necessarily in the optimal way. Economic behaviour is linked directly to individual decision makers and situational-related constraints. CONTENT THEORIES Focuses on the needs individuals attempt to satisfy motivation is a process. Intrinsic Motivators - From within(self-esteem, responsibility) Extrinsic Motivators External(Pay, appreciation) Maslows Hierarchy of Needs 1. 2. 3. 4. 5. Physiological Money, food, shelter Safety & Security Seniority, Union, guaranteed job Belonging Acceptance, primary work group, family Esteem Status, title, recognition, promotion Self-Actualisation Self-fulfillment, achievement Acc. to Maslow, an average individual might be 85% satisfied in Physiological needs,70% in safety needs, 50% in love & belonging needs and 10% in selfactualisation needs. Herzbergs Two-Factor Theory 1. Hygiene Factors: Supervision Company policy

Peers Pay Job security Working conditions Hygiene factors do not serve to promote job satisfaction, their absence creates dissatisfaction; low motivation span. 2. Motivator Factors Achievement Advancement Recognition Responsibility Motivator factors makes up a continuum leading from no job satisfaction to satisfaction; higher motivation span. McClellands Four Modes for Success 1. Need for Autonomy 2. Need for Affiliation 3. Need for Achievement 4. Need for Power PROCESS THEORIES Expand on the content theories by describing how the motivation process works. More useful than content theories; provide how to develop each part and how to review the result.

1. Expectancy Theory by Victor H. Vroom This model provides three guidelines for designing incentives: The need to define or identify explicitly certain desired actions(activities) The need to relate specific outcomes and consequences to the demonstration of certain actions The need to provide the consequence within some established schedule. If money is to motivate behaviour, employees must both desire it and believe that it will be forthcoming if they behave in the manner prescribed. Thus, the actual effect of its influence comes from employee assessment of: The value of money in meeting personal needs. The strength of expectancy that the prescribed behaviour will actually result in the obtainment of the proffered reward. Motivational force = Valency x Expectancy Valence : Value of the perceived outcome of the prescribed behaviour The immediate or primary outcome(money, promotion) The secondary outcome that stems from primary. (Money will buy a car, promotion will get status) Expectancy : that the behaviour will actually result in a realization of the outcome. Though the employee may highly value the proffered reward, its availability will have little impact upon behaviour if he/she doesnt perceive (10 personal capacity

to behave in the manner prescribed, and (2) a definite linkage between the behaviour desired and the valued payoff. Efforts Reward Perceived Probab. Of Success Level of Performance Outcome Reward Actual Value or

Probability of receipt of reward

Perceived Value of Reward

2. Skinners Operant Conditioning Operant (learned) behaviour depends on its consequences but also the environment shapes, changes, and directs behaviour. Individuals take no active role in shaping their own behaviour; they are merely agents responding to outside forces. The concept of needs, derives or goal-directed behaviour is unacceptable because of the inability to observe, identify, and measure these forces. Permanent change in individual behaviour results from reinforcement of a particular behaviour. Learn ] Receive Repeat ] Identify } Requirements Behave consequences Modify } Behaviour Perform ] of behaiour Terminate ]