Unit 4: Compensation-Definition, Concept and Objectives

Definition:
• Compensation is defined as the money the money received for the performance of work plus
the many kind of benefits and services organization provides to its employees
Concept:
• Money comes under direct compensation, financial compensation whereas other benefits
comes under indirect, non financial compensation.
• The base wages and salary are the foundation of employee pay structure and the total
compensation is calculated after these are fixed
• The total compensation also includes other elements like incentives and benefits like: life,
health, accidental insurance, employer’s contribution to retirement, pay for vacation or
illness, paid maternity leave, company accommodation, club membership, credit cards,
interest free loans etc.
• Compensation of employee consist of three components 1) base wage or 2) Salary 3)
Incentives and Benefits.
Objectives:
1. Legal Requirement
2. Attracting Talented Resources
3. Retaining and Motivating Employee
4. Financial Management
5. To meet employees social security need and improve their Quality of Work Life
6. To reward employees employment by granting special privilege
7. Maintaining harmonious industrial relation
8. Enhancing organizational commitment
 Compensation-Importance/Significance
Importance:
1. To fulfill Legal Requirement
2. Maintain equity in the distribution of wages and salaries in the
organization
3. Maintain competitiveness in the wage market in comparison to other
players in the industry
4. Attracting Talented Resources
5. Retaining and Motivating Employees by matching Employee Expectations
6. To meet employees social security need and improve their Quality of
Work Life
7. To reward employees employment by granting special privilege
8. Maintaining harmonious industrial relation with respect to compensation
9. The effective compensation system is a platform for creating happy and
satisfied workforce which enhancing organizational commitment and
employee turnover. As a result organization enjoys stability
10. A sound compensation system is the hallmark of success and prosperity
of the organization.
 Compensation- Factors in Compensation Plan

Compensation of employee consist of three components 1) Base Wage or 2)Salary 3) Incentives

and Benefits. Base wage or salary forms the basis for calculating or determining the total
compensation of an employees

There are three types of wages: 1) Minimum wages- Least wages to be given to employees and his
family for survival, mandatory in nature 2) Fair Wage: It depends on the paying capacity of
employer 3) Living wage: It is highest of three which ensure comfortable living of employee and his
families.

Wage Differentials: It is the difference in wages paid for same or similar work because various
reasons like differences in work schedules, hazard involved, cost of living and other factors. The
wage differential across the country has given rise to National Wage Policy.

Concept of Reward: These are of two types: 1) Extrinsic Rewards- These are tangible and within
the control of organization 2) Intrinsic Rewards- These are intangible and depends on the
individual perception. Rewards can be also be classified in 1) Monetary and Non-Monetary
Rewards
 Compensation- Factors in Compensation Plan
Incentives: These are the rewards given to an employee, over and above his
salary, in recognition of his performance. They can be termed as performance
based rewards.
• Incentives can be monetary as well as monetary. Incentives plan are both
long term and short term. Short Term incentive plan rewards the employee
immediately for his performance over a short period, normally a day.
• Long-Term incentive plans like profit-sharing plan and employee stock option
plan rewards the employee for his performance over a continued period of
time either one year or his entire tenure with the organization.
• Incentive plans to be effective, have to be perceived as fair and transparent
by the employees and should not affect the company bottom-line.
• Incentives Example: Monetary and Non Monetary Incentives
• Monetary Incentives- Short Term, Long Term: Annual Bonus, Profit Sharing,
Employee Stock Option Plans
• Non-Monetary Incentives- Recognition of Employee Contribution either
Socially or informally, Assigning challenging assignments and rewarding the
same with free gifts or free vacations after the completion of assignment, to
boost employee moral. Awards in the form of Incentives. Giving additional
responsibilities.
 Compensation- Factors in Compensation Plan
Benefits: These are rewards an employee receives as a result of his employment with
the organization and his position in the organization. They are also called as
membership based rewards
• The basic purpose of benefits is to retain and motivate employees and improve
their organizational commitment
• More and more organizations are designing innovative benefit scheme to attract
and retain employees
• The diversity in workforce gives rise to a need for different benefit schemes to
match individual needs. Therefore contemporary benefit program try to provide
flexibility to employees in designing their own customized program, from a basket
of benefit schemes. This is called as cafeteria-style benefit plan.
Example: Statutory and Non Statutory : 1)Free or Subsidized lunches 2) Medical
facilities to the employees and his family 3) Paid holiday /vacation to the
employee and his family 4) Retiral benefits like PF and Gratuity 5) Employee
Insurance 6) Maternity Leave 7) Child Care centers 8) Educational allowance for
employees children 9) Scholarships for employees children 10) Company
accommodation 11) Company Transport facilities 12) Cafeteria and Rest Rooms
13) Study Leave 14) Company Sponsored Study 15) Club Membership 16) Interest
Free Loans 17) Credit Cards 18) Recreational facilities 19) Business and
Professional Membership. 20) Tax Assistance
 Current Trends in Compensation

• Performance-based pay
• Competence related pay
• Skill-based pay
• Incentive schemes
• Team-based pay
Performance-Based Pay: Pay-for- performance system is also called
incentive system, rewards employee’s performance on the basis of three
assumptions.
• Employees and work teams differ in how much they contribute to the
firm not only in what they do, but also in how well they do it.
• The overall performance of the organization largely depends on the
performance of individuals and groups.
• To attract, retain, and motivate high performers and to be fair to all
employees, a company needs to reward employee on the basis of their
relative performance.
 Current Trends in Compensation

• Competence Related Pay It is an underlying characteristic of

an individual which is casually related to effective and
superior performance. Difference as follows:
Competence pay Performance pay
how work is done (behavior) what work is done
It is made by assessing They are usually made by
behavior and the outcomes of comparing results against
that behavior against individuals or team objectives
competence profiles,
It looks forward in the sense that it It looks backwards- This is what the
implies when people have reached employees have achieved and
a certain level of competence rewarding their achievement.
It helps to integrate core, generic It helps to integrate corporate,
and individual competences, individual or team objectives.
 Current Trends in Compensation

Skill Based Pay : It refers to a pay system in which pay increases are linked to the
number or depth of skills an employee acquires and applies.
The pay increases are usually tied to three types of skills.
Horizontal skills : which involve a broadening of skills in terms of the range of
tasks.
Vertical skills : which involve acquiring skills of a higher level.
Depth skills : which involve a high level of skills in specialized areas relating to
the same job.
Incentives Schemes:
Shop-floor incentives
Payment by results
Sales force incentive schemes
Executive pay
Team Based Pay: It provides rewards to teams or groups of employees carrying
out similar and related work which is linked to the performance of the team.
Team may usually be paid in the form of a bonus which is shared amongst
team members in proportion to their best rate of pay.
 Current Trends in Compensation
Profit Sharing : It is a plan under which an employer pays to eligible employees, as an
addition to their normal remuneration, a special sum in the form of cash or shares in
the company related to the profit of the business.

Gain Sharing: It is based on the assumption of better cooperation.

It is an incentive plan that engages many or all employees in a common effort to
achieve a company's productivity objectives with any resulting cost savings gain
shared among employees and the company. ------ Garry Dessler

Employee stock ownership plan (ESOP): It is a defined contribution employee

benefit plan that allows employees to become owners of stock in the company
they work for

Broad banding: A base pay technique which reduces the number of salary levels into
broad salary bands. The bands normally have fixed minimum and maximum, which
overlap with other bands. Example: If salary band for the entry level is fixed as Rs.
10,000-Rs. 18,000 the salary band for next level can be Rs. 12,500 –Rs. 22,000/-

Variable Pay: Designed to pay employees in accordance to their performance and not in
accordance to their position. These are designed to encourage individual and group
performance effectively. They differentiate performer from non performer.
 Employee Separation Schemes
• Employee separation occur when employees cease to be members of the organization. The
service agreement between employee and employer comes to an end and the employees
decides to leave organization. This happens in the following Mode
• Retirement- Termination of services on reaching the age of superannuation is called
Retirement. To avoid problem organization normally plan replacement to retiring employees
before hand.
• Termination: BY the employer of the service of workman for any reason whatsoever,
otherwise than as a punishment inflicted by the way of disciplinary action but does not
include: 1) VRS 2) Retirement 3) Termination of Contract period and non renewal 4)
termination on the ground of continued ill-health
• Voluntary Retirement Schemes/Golden Handshake: The employer may encourage the
employee to retire voluntarily with the view to reduce surplus staff and cut down labor cost.
Attractive compensation benefits are generally in-built in all such plans (Golden Handshake
Schemes). Reasons for VRS: Reduced burden of un productive employees, Downsize, Change
in Technology, Recession, Takeover, Merger, JVs.
• Suspension: It means prohibiting an employee from attending the work and performing
normal duties assigned to him. It is sort of punishment for the specified period and is
generally resorted to only after proper enquiry has been conducted. During suspension
employee receives subsistence allowance as follows:
-At the rate of 50% - For 90 days
- At the rate of 75 % - Beyond 90 days
If the employee is found guilty then suspension leads to Termination.
 Industrial Relations Disputes Prevention Machinery
There are various means to prevent Industrial Disputes:
• Workers Participation
• Employee Grievance Redressal Machinery
• Voluntary Arbitration
• Conciliation
• Court of Enquiry
• Tripartite Bodies
• Adjudication
-Labour Court
-Industrial Tribunals
-National Tribunals
Grievance Procedure in Indian Industry
Concept of Grievance:
1. A grievance is a sign of employee’s discontent, either with the job or the
organization
2. The gap between employee expectations and organizational rewards normally leads
to grievance
3. The Management should show genuine concern and use humanitarian approach
while dealing with employee grievances.
4. The grievance of an employee might have little significance to the management, but
for the employee, it is a great significance as it concern his career and his future in
the organization. Therefore a grievance should be analyzed and settled using a
humane approach along with procedural and legal approaches.
 Grievance Procedure in Indian Industry

Causes of Grievance:
1. Dissatisfaction of employees with his compensation or different components of
compensation like incentives or benefits;
1. Employee disappointment resulting from denial of a promotion or a transfer.
2. Unpleasant relationship with supervisors and other colleagues;
3. Unhealthy or harmful working conditions;
4. Job assignment that do not match with employees skill and aptitude;
5. Lack of adequate resources to achieve objectives of the job;
6. Denial of leave, overtime or other benefits.

Need For Grievance Redressal:

1. Grievance affects employee performance
2. It lead to unpleasantness and an unhealthy work environment.
3. It gives opportunity in an effective redressal procedure
4. It keep a check on arbitrary actions
5. It helps in upward communication
6. It helps management in strategic planning
7. It helps to maintain good Industrial Relations
8. It helps management to win the trust and confidence of employees.
 Grievance Procedure in Indian Industry

Effective Grievance Redressal Procedure :

1. Enjoys the trust, confidence and respect of all the employees and the management.
2. Identifies root cause of employees grievance
3. Resolve the issues at the lowest possible level
4. Resolve the issues in an amicable manner.
5. Resolves the issues without any delay
6. Does not result in any violation of organizational rules and policies
7. Provides data and information management of employee grievances.
8. Tracks the redressal procedure to provide the current status to the employees and
the management.
9. Helps the management to identify the core issues, which need to be avoided in
future
10. Provides unbiased and objective redressal of employee grievances
11. It is a short and simple procedure that can be easily understood by all the employees
12. Consider the legal, social, financial and psychological aspects for an amicable
settlement.
 Model Grievance Redressal Procedure

Voluntary Arbitration VI Stage Settlement

within 7 days
NS
Committee of Union and
Management Representative V Stage Management’s
Decision on
revision within 7 days
NS
IV Stage Decision within
7 days Manager

III Stage
NS
Decision within
7 days Grievance Committee
NS
Head of the Department
II Stage
Departmental
Decision With in Representatives
3 days NS
Supervisor
I Stage
Departmental
Response within
48 Hrs Representatives
NS
Foreman

NS= Not
Satisfied Conveys Verbally
Grievant employee