HRMG1021 Unit-4 K.

Rakshit

HRMG (1021) Human Resource Management

Unit-4 Compensation and Integration
Compensation and Integration: Introduction - Basic factors in determining pay rates –
Basic, Supplementary and Executive Remuneration – types of employee bene ts and
services - Quality of work-life – Collective Bargaining.

4.1 Compensation:
“Compensations are the outcomes (rewards) employees receive in exchange for their
work, or Pay is an exchange between the individual or group and the employer”.

Compensation is the remuneration awarded to an employee in exchange for their services

or individual contributions to your business. The contributions can be their time,
knowledge, skills, abilities and commitment to your company or a project.

Financial compensation is either direct or indirect. Direct nancial compensation consists

of the person receiving in the form of wages, salaries, bonuses or commissions etc.

Indirect compensation consists of the like praise, self-esteem, recognition, motivation,

and productivity, (Bene ts and Welfare).

Objectives of Compensation:
The objective of the compensation is to create a system of rewards that is equitable to
employers and employees alike. The desired outcome of the employees is to attract the
employees toward the tasks. And motivated to do a good job for the employer. The
compensation policy depends on certain criteria below:

1. Adequate
2. Equitable
3. Balanced
4. Cost-e ective
5. Secure
6. Incentive providing
7. Acceptable to the employee

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Compensation System:

Compensation (An Overview):

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Importance of employees’ compensation or reward system :

• Attracts top talent

• Increases employee motivation in the workplace

• Boosts employee loyalty

• Increases productivity and pro tability

• Improves job satisfaction and employee engagement

• Helps in retaining top employee

• Helps stay in compliance with the Federal and State government agencies

Classi cation of Compensation:

Classi ed into three categories:

Base or Primary Compensation: Refers to basic pay in the form of wages and salaries.

Supplementary Compensation: Consists of fringe bene ts such as housing, medical

aid, paid leave, retirement bene ts, etc.

Incentive Compensation: Refers to monetary compensation paid to motivate

employees.

Base and Supplementary Compensation:

Base Compensation
It means wages and salaries paid to
employees.
Wage and salaries are paid in cash.
Wage and salaries are paid to compensate
employees for their services.
Supplementary Compensation
It means fringe bene ts paid in addition to
wage and salaries.
Fringe bene ts are paid in kind.
Fringe bene ts are paid to retain
employees and to increase their e ciency.

Wage and salaries are determined on the Fringe bene ts depend mainly on the
basis of job evaluation and other relevant company’s policies and needs.
factors.

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4.2 Types of Compensation:

Direct nancial compensation:

It is the most widely known and recognized form of compensation. Most sought after by
workers, direct compensation is the money which is paid directly to employees in
exchange for their labour. This includes everything from hourly wages, to set salaries,
bonuses, tips and commissions. Types of direct compensation are:

Salary and wage: Direct compensation includes basic annual salaries or hourly wages
paid to workers in return for their services to the company account. It refers to the
monetary bene ts received for work done for a speci c duration like an hour, a week, a
month or a year. It includes workers’ nancial compensation payments, contractual
payments, pay for unscheduled time, and over time, as well as any retroactive pay.

Car allowance: Companies may o er their employees the use of a car and/or a fuel
allowance. They may also cover the cost of parking, public transportation, or cab fare for
the employee.

Housing allowance: If workers have to relocate because of work, companies may

provide their workers with a housing allowance. Some companies even provide
accommodation to facilitate the process of relocation.

Medical reimbursement: Companies may o er workers medical reimbursements for

medical claims covering not only workers themselves, but also their family members. The
claims include reimbursement for medical bills as well as health insurance.

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Indirect nancial compensation:
It includes all monies paid out to an employee that are not included in direct
compensation. This form of compensation is often understood as the portion of an
employee’s contract that covers items such as temporary leaves of absence, bene ts and
retirement plans. Types of indirect compensation:

• Insurance (health, dental, vision, etc.)

• Paid leave (vacations, holidays, sick days, etc.)

• Retirement contributions

• Career development programs

• Tuition reimbursement

• Student loan repayment assistance

• O ce snacks

Non- nancial compensation:

It di ers from direct and indirect pay as it has no monetary value. Non- nancial incentives
are the types of rewards that are not a part of an employee’s pay. Non-monetary
incentives are typically e ective for employees who are comfortable with their salaries or
have been in the position for a long time. Compensation if this nature can include:
Achievement awards, team leadership opportunities, personal days, prizes, paid training,
gift cards, new o ce or workspace upgrade or even paid parking or transit passes.

Developmental opportunities: Employers can choose to provide developmental

opportunities to employees. This can be a useful form of non- nancial compensation as it
bene ts both an employer and an employee. When an employer o ers opportunities for
employees to develop their skills so they can continue to advance within the company, an
employer also bene ts from possessing more motivated and skilled employees. Such
opportunities may include paid education or certi cation, developmental classes with
experts or informative conferences and retreats.

Recognition: Many employees prefer to be recognized by their employers for the hard
work they complete. Employers can show gratitude for their employees in a number of
ways, including:

• O ering bonuses for e ective performance

• Providing free meals to sta for a particular e ort

• Verbalizing appreciation to employees for their hard work

• Celebrating achievements and milestones in a monthly company newsletter

• Hosting a company-wide holiday dinner after a large project's completion

Recognizing employees lets them know that the work they do is valuable to their
employer. By doing this, employers may experience an increase in employee
engagement, improved e ciency and greater rates of retention.

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Flexible schedules: Many employees seek exible schedules when searching for new
roles in an attempt to prioritize a healthy work-life balance when choosing an employer.
Some employers allow their employees to set their own schedules if it doesn't
compromise the quality of their work. For example, someone with children or those who
care for an elderly parent might appreciate a exible schedule because they can take
those who depend on them to appointments or complete necessary errands during the
day when most businesses are open.

Discounts or memberships: Because many employees spend much of their week

working within an o ce, some employers have decided to ensure that the work
environment they o er allows employees to maintain healthy habits. For example, some
businesses provide on-site gyms to employees to relieve stress and remain physically t.

Issues in Compensation Management:

1. Internal Equity vs External Equity: Internal equity refers to the fairness of pay among
current employees working for the same company and performing the same or similar
jobs. External equity refers to the fairness of pay against the external market.  External
equity compares what the company is willing to pay for talent versus what outside
organizations competing for the same talent are willing to pay.

2. Fixed Pay vs Variable Pay: Fixed pay is the xed amount of salary that an employee
gets at the end of the month whereas Variable pay is the incentive paid to the
employee, monetary or non-monetary, based on their performance for the month.

3. Performance vs Membership: Performance-based rewards are allocated based on

the performance of an employee in a company. Performance-based rewards are given
in pay plans, incentive systems, group bonuses, or commissions. Membership-based
rewards are given in the form of bene ts and services provided to the company's
employees. For example, it might be in the form of the annual Christmas bonus,
company retreat, upgraded o ce furnishing, etc.

4. Job vs Individual Pay: A job-based pay structure is a structure of salary payments

that is built on compensable factors determined by the job. In other words, the salary
for a job is determined by its responsibilities, and sometimes its work conditions. Like
a job-based structure, developing a person-based pay structure also requires an
understanding of the tasks and responsibilities of jobs in a business. Similarly, the
development of the structure requires job analysis and job descriptions. The
di erence is that it compensates the job incumbent (person) in terms of his
knowledge, competencies and skills.

5. Elitism vs Egalitarianism: The elitism pay system means di ering compensation

plans that could be based on things such as organizational level or employee group.
An egalitarian pay system places most employees under the same compensation
plan.

6. Monetary vs Non-Monetary Rewards: Monetary incentives are solid cash rewards

which are presented to employees for exceptional performance or attainment of long-
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term goals. As the name suggests monetary incentives have a monetary value and the
employees can instantly recognize their exact worth. Non-monetary incentives are
presented for exceptional job performance or attainment of special goals that add
value to the company such as achievement of sales goals, completing professional
training, certi cations and conducting successful research programs etc.

7. Centralization vs Decentralization of Pay Decisions: The place of the decision-

making authority in the hierarchy of the management i.e. Centralized. The degree of
decision-making power at the lower echelons in the organization i.e. Decentralized.

Components of Compensation:
Basic Pay: Basic pay is generally determined through job evaluation which is the process
of systematically ascertaining the relative worth of a job.

Allowances:
Dearness Allowance: Percentage of basic pay acc. Organization.

House Rent Allowance: Percentage of BP of 30 per cent in case of government

employees.

City Compensatory Allowance: This allowance is paid generally in metros and other big
cities where the cost of living is high.

Transport Allowance/Conveyance Allowance: A xed sum is paid every month to cover

a part of travelling charges.

Incentives: It is performance-based remuneration. Bonus, pro t-sharing, commission on
sales, etc are examples.

Fringe Bene ts/Perquisites: Particularly to managers, PF, gratuity, LTC, encashment of

earned leaves, company house, company car, medical aid, interest-free loan, stock
options, etc.

Factors A ecting Compensation:

Factors a ecting wages or compensation or determinants of wages or compensation:

1. Productivity of workers: to get the best results from the employees and to increase
productivity compensation has to be productivity based.

2. Ability to pay: it depends upon the employer’s ability to pay wages to the workers.
This depends upon the pro tability of the rm. If the rm is marginal and can’t a ord
to pay higher than the competitors then the employees will go to other rms while if
the company is successful then they can easily pay their employees as they wish.

3. Government: the government has also xed the rules for protecting the interest of the
employees. The organizations are liable to pay as per the government instructions.
Wages can not be xed below the level prescribed by the government.

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HRMG1021 Unit-4 K. Rakshit
4. Labour union: labour union also helps in paying better wages to the workers. Higher
wages have to be paid by the rm to its workers under the pressure of the trade
unions.

5. Cost of living: wages depend upon the cost of living if it is high wages will also hike.

6. Demand and supply of labour: it is one of the important factors a ecting wages. If
the demand for labor is more they will be paid high wages otherwise vice versa. If the
supply of the employees is more then they will be paid less and vice versa.

7. Prevailing wage rate: wages also depends upon the prevailing wage rate as the
organizations have to pay accordingly to keep the employees with them.

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