UNIT- 3

HUMAN RESOURCE MANAGEMENT

CONTENT TO STUDY:

COMPENSATION MANAGEMENT AND EMPLOYEE RELATIONS:

1) Introduction to compensation management,

2) Components and structure of Employee compensation.
3) Factors affecting employee compensation,
4) Employee incentive schemes and recent trends in compensation management.
5) Meaning of Employee Relation and Industrial Relations

INTRODUCTION TO COMPENSATION MANAGEMENT:

Compensation management refers to the systematic approach and processes that organizations
use to design, implement, and administer their compensation programs. It involves the strategic
planning, development, and management of various aspects of employee compensation,
including wages, salaries, bonuses, incentives, benefits, and non-monetary rewards.

The primary goal of compensation management is to ensure that employees are fairly and
equitably compensated for their contributions to the organization while aligning with the overall
business objectives. It involves establishing compensation structures, policies, and practices that
attract, motivate, and retain talented employees.

COMPONENTS OF COMPENSATION

Compensation as a whole is made up of different components that work as an aid for an

employee after retirement or in case of some accident or injury. Now we shall see the key
elements or components that make compensation.

1) Wages and Salary

Wages mark hourly rates of pay, and salary marks the monthly rate of pay of an employee. It
is irrelevant of the number of hours put in by an employee working in the firm. These are
subject to annual increase.
 2) Allowances

Allowances can be defined as the amount of something that is allowed, especially within a
set of rules and regulations or for a specified purpose. Various allowances are paid in
addition to basic pay.

Some of these allowances are as follows −

3) Dearness Allowance − This allowance is given to protect real income of an employee

against price rise. Dearness allowance (DA) is paid as a percentage of basic pay.

4) House Rent Allowance − Companies who do not provide living accommodation to their
employees pay house rent allowance (HRA) to employees. This allowance is calculated
as a percentage of salary.

5) City Compensatory Allowance − This allowance is paid basically to employees in

metros and other big cities where cost of living is comparatively more. City
compensatory allowance (CCA) is normally a fixed amount per month, like 30 per cent
of basic pay in case of government employees.

6) Transport Allowance/Conveyance Allowance − Some companies pay transport

allowance (TA) that accommodates travel from the employee’s house to the office. A
fixed amount is paid every month to cover a part of traveling expenses.

7) Incentives and Performance Based Pay

Incentive compensation is performance-related remuneration paid with a view to encourage

employees to work hard and do better. Both individual incentives and group incentives are
applicable in most cases. Bonus, gain-sharing, commissions on sales are some examples of
incentive compensation.
 8) Fringe Benefits/Perquisites

Fringe benefits include employee benefits like medical care, hospitalization, accident relief,
health and group insurance, canteen, uniform, recreation and the likes.

In recent years, a great deal of attention has been directed to the development of compensation
systems that go beyond just money. We can say that all the components of compensation
management play a very important role in the life of an employee.

In particular, there has been a marked increase in the use of pay-for-performance (PrP) for
management and professional employees, especially for executive management and senior
managers. Compensation is a primary motivation for most employees.

Types of Compensations

1) Direct Compensation

It is naturally made up of salary payments and health benefits. The creation of salary ranges
and pay scales for different positions within an organization are the central responsibility of
compensation management staff. Direct compensation that is in line with the industry
standards facilitates employees with the assurance that they are getting paid fairly. This helps
the employer not to worry about the costly loss of trained staff to a competitor.

2) Indirect Compensation

It focuses on the personal encouragements of each individual to work. Although salary is

essential, people are most productive in jobs where they share the company's values and
priorities. These benefits can include things like free staff development courses, subsidized
day care, the chances for promotion or transfer within the company, public recognition, the
ability to effect change or bring some changes in the workplace, and service to others.

These are the two types of compensation that need to be managed and have its own contribution
in the development of the organization. Moving forward, we will see the different components of
compensation.
STRUCTURE OF COMPENSATION OF EMPLOYEE:

FACTORS AFFECTING EMPLOYEE COMPENSATION:

1) Productivity of workers– Productivity-based compensation helps derive the best results.

The higher the productivity of employees, the more should be the compensation.
2) Ability to pay– If your company has high profitability, you can pay better compensation
and retain your employees and vice versa.
3) Government Policies– Government also has certain policies to protect employee
interests. The employer has to pay the employees as per governmental regulations and
provide benefits such as PF, medical insurance, gratuity, and pension.
4) Labour Unions– They also play an essential role in ensuring employees get a fair wage.
They fight with the employers for the employee’s rights and wage revision.
5) Cost of Living– Cost of living also influences compensation to a large extent. An
employee based in a city with a high cost of living needs a higher salary and vice versa.
6) Demand and Supply of Labour– It is one of the most important factors that affect the
compensation of employees. If the demand is more than the supply, the compensation
will be higher.
7) Industry Standards– No employee would like to join a company whose compensation is
below the industry standards. Therefore you need to analyse the standard market rates of
different roles and pay your employees accordingly.

EMPLOYEE INCENTIVE SCHEMES:

Incentives can be defined as monetary or non-monetary reward offered to the employees for
contributing more efficiency. Incentive can be extra payment or something more than the regular
salary or wage. Incentive acts as a very good stimulator or motivator because it encourages the
employees to improve their efficiency level and reach the target. The two common types of
incentives are:

1. Monetary or Financial Incentives

The reward or incentive which can be calculated in terms of money is known as monetary
incentive. These incentives are offered to employees who have more physiological, social and
security need active in them. The common monetary incentives are:

1) Pay and allowances. Regular increments in salary every year and grant of allowance act
as good motivators. In some organizations pay hikes and allowances are directly linked
with the performance of the employee. To get increment and allowance employees
perform to their best ability.
2) Profits sharing. The organization offer share in the profits to the employees as a
common incentive for encouraging the employees for working efficiently. Under profits
sharing schemes generally the companies fix a percentage of profits, and if the profits
exceed that percentage then the surplus profits is distributed among the employees. It
encourages the employees to work efficiently to increase the profits of the company so
that they can get share in the profits.
3) Co-partnership/stock option. Sharing the profit does not give ownership right to the
employees. Many companies offer share in management or participation in management
along with share in profit to its employees as an incentive to get efficient working form
the employees. The co-partnership is offered by issue of shares on exceeding a fixed
target.
4) Bonus. Bonus is a onetime extra reward offered to the employee for sharing high
performance. Generally when the employees reach their target or exceed the target then
they are paid extra amount called bonus. Bonus is also given in the form of free trips to
foreign countries, paid vacations or gold etc. some companies have the scheme of
offering bonus during the festival times.
5) Commission. Commission is the common incentive offered to employees working under
sales department. Generally the sales personal get the basic salary and also with this
efforts put in by them. More orders mean more commission.
6) Suggestion system. Under suggestion system the employees are given reward if the
organization gains with the suggestion offered by the employee. For example, if an
employee suggests a cost saving technique of then extra payment is given to employee
for giving that suggestion. The amount of reward or payment given to the employee
under suggestion system depends on the gain or benefit which organization gets with that
suggestion it is a very good incentive to keep the initiative level of employees high.
7) Productivity linked with wage incentives. These are wage rate plans which offer higher
wages for more productivity. Under differential piece wage system efficient workers are
paid higher wages as compared to inefficient workers. To get higher wages workers
perform efficiently.
 8) Retirement benefits. Some organizations offer retirement benefits such as pension,
provident fund, gratuity etc. to motivate people. These incentives are suitable for
employees who have security and safety need.
9) Perks/ fringe Benefits/ perquisites. If refers to special benefits such as medical facility,
free education for children, housing facility etc. these benefits are over and above salary.
These extra benefits are related with the performance of the employees.

2. Non-Monetary/Non-Financial Incentives

Money is not the only motivator, the employees who have more of esteem and self-actualization
need active in them get satisfied with the non-monetary incentives only. The incentives which
cannot be calculated in terms of money are known as non-monetary incentives. Generally people
working at high job position or at high rank get satisfied with non-monetary incentives. The
common means or ways of non-monetary incentives are:

1) Status. Status refers to rank, authority, responsibility, recognition and prestige related to
job. By offering higher status or rank in the organization managers can motivate
employees having esteem and self- actualization need active in them.
2) Organizational climate. It refers to relations between superior/ subordinates. These are
the characteristics which describe and organization. These characteristics have direct
influence over the behavior of a member. A positive approach adapted by manager
creates better organizational climate whereas negative approach may spoil the climate,
Employees are always motivated in the healthy organizational climate.
3) Career advancement. Managers must provide promotional opportunities to employees.
Whenever there are promotional opportunities employees improve their skill and
efficiency with the hope that they will be promoted to high level. Promotion is a very big
stimulator or motivator which induces people to perform to their best level.
4) Job enrichment/ assignment of challenging job. Employees get bored by performing
routine job. They enjoy doing jobs which offer them variety and opportunity to show
their skill. By offering challenging jobs, autonomy to perform job, interesting jobs,
employees get satisfied and they are motivated. Interesting, enriched and challenging job
itself is a very good motivator or stimulator.
5) Employee’s recognition. Recognition means giving special regard or respect which
satisfies the ego of the subordinates. Ego-satisfaction is a very good motivator. Whenever
the good efforts or the positive attitudes are show by the subordinates then it must be
recognized by the superior in public or in presence of other employees. Whenever if there
is any negative attitude or mistake is done by subordinate then it should be discussed in
private by calling the employee in cabin. Examples of employee’s recognition are
congratulating employee for good performance, displaying the achievement of employee,
giving certificate of achievement, distributing mementos, gifts etc.
 6) Job security. Job security means life time bonding between employees and organization.
Job security means giving permanent or confirmation letter. Job security ensures safety
and security need but it may have negative impact. Once the employees get job secured
they lose interest in job. Of example government employees do not perform efficiently as
they have no fare of losing job. Job security must be given with some terms and
conditions.
7) Employee’s participation. It means involving employee in decision making especially
when decisions are related to workers. Employees follow the decision more sincerely
when these are taken in consultation with them for example if target production is fixed
by consulting employee then he will try to achieve the target more sincerely.
8) Autonomy/ employee empowerment. It means giving more freedom to subordinates.
This empowerment develops confidence in employees. They use positive skill to prove
that they are performing to the best when freedom is given to them.

MEANING OF EMPLOYEE RELATION AND INDUSTRIAL RELATIONS:

Employee relations in HRM refers to the management and cultivation of relationships between
employers and employees within an organization. It encompasses the policies, practices, and
activities aimed at creating a positive work environment, promoting effective communication,
resolving conflicts, and ensuring fair treatment of employees. Employee relations focus on
establishing a harmonious and productive relationship between the organization and its
workforce. Here's an example to illustrate employee relations in HRM:

Example:

XYZ Company has a strong employee relations program in place. The HR department actively
engages in activities that foster positive relationships and open communication between
management and employees. They understand the importance of addressing employee concerns,
promoting employee well-being, and ensuring fair treatment.

1) Open Door Policy: XYZ Company has implemented an open door policy, encouraging
employees to approach their supervisors or HR representatives with any issues or
concerns they may have. This policy promotes open communication, trust, and provides
employees with an avenue to address their grievances or seek guidance.
 2) Employee Feedback and Surveys: To gauge employee satisfaction, XYZ Company
conducts regular employee feedback surveys. These surveys collect feedback on various
aspects such as work environment, job satisfaction, communication, and management
practices. The HR department analyzes the feedback and takes necessary actions to
address concerns and improve employee experiences.

3) Conflict Resolution: In case of conflicts or disputes, XYZ Company has a structured

process in place for conflict resolution. HR mediates between employees involved in
conflicts, listens to their concerns, and works towards finding a mutually agreeable
solution. This helps maintain a harmonious work environment and prevents conflicts
from escalating.

4) Employee Assistance Programs: XYZ Company offers employee assistance programs

(EAPs) to support employees' well-being. These programs provide counseling services,
mental health support, and resources to help employees deal with personal or work-
related challenges. This demonstrates the company's commitment to employee welfare
and contributes to a positive work culture.

5) Employee Recognition and Rewards: XYZ Company values employee recognition and
rewards outstanding performance. They have established employee recognition programs
that acknowledge employees' achievements, contributions, and milestones. This not only
boosts morale but also motivates employees to excel and feel valued.

6) Employee Engagement Activities: To foster a sense of belonging and engagement,

XYZ Company organizes team-building activities, social events, and employee
appreciation events. These activities encourage employees to connect with their
colleagues, build strong working relationships, and feel a sense of camaraderie within the
organization.

By prioritizing employee relations, XYZ Company creates a positive work environment where
employees feel heard, valued, and supported. This contributes to higher employee satisfaction,
increased productivity, and better overall organizational performance.
INDUSTRIAL RELATIONS:

Industrial relations in HRM refers to the study and management of relationships between
employers, employees, and trade unions within the framework of an organization or industry. It
focuses on establishing and maintaining a harmonious and productive working environment by
addressing issues related to labor laws, collective bargaining, workplace policies, and employee
rights. Industrial relations involve various stakeholders, including management, employees,
unions, and government bodies. Here's a further explanation of industrial relations in HRM:

1) Collective Bargaining: One of the key aspects of industrial relations is collective

bargaining, which involves negotiations between employers or their representatives and
employee representatives (often trade unions) to establish terms and conditions of
employment, such as wages, working hours, benefits, and workplace policies. Collective
bargaining aims to ensure a fair and equitable relationship between employers and
employees.

2) Labor Laws and Regulations: Industrial relations encompass compliance with labor
laws and regulations set by local, state, and national authorities. These laws govern areas
such as minimum wages, working hours, safety and health standards, leave entitlements,
discrimination, and termination procedures. HR professionals play a crucial role in
ensuring that organizations comply with these laws and maintain good industrial
relations.

3) Grievance Handling and Dispute Resolution: Industrial relations involve effectively

addressing and resolving employee grievances and disputes that may arise in the
workplace. HR departments play a key role in establishing mechanisms and processes for
handling complaints, conducting investigations, and implementing fair resolution
procedures. This helps maintain a healthy work environment and prevent conflicts from
escalating.

4) Employee Representation: Industrial relations recognize the importance of employee

representation in decision-making processes within organizations. Trade unions or
employee associations may act as representatives of employees, voicing their concerns,
negotiating collective agreements, and participating in discussions with management on
matters affecting the workforce.
 5) Employee Participation and Consultation: Industrial relations promote employee
participation and consultation in decision-making processes that affect their interests and
working conditions. Organizations may establish structures such as works councils, joint
consultation committees, or employee forums to facilitate communication and
collaboration between management and employees.

6) Workplace Policies and Procedures: Industrial relations involve developing and

implementing workplace policies and procedures that govern employee behavior, work
expectations, and employment conditions. These policies cover areas such as disciplinary
actions, performance management, employee benefits, promotion criteria, and grievance
resolution mechanisms.

7) Employee Welfare and Benefits: Industrial relations encompass providing employee

welfare initiatives and benefits to enhance the well-being and job satisfaction of
employees. This may include healthcare benefits, retirement plans, leave policies,
training and development opportunities, and work-life balance initiatives.

Effective industrial relations management fosters a cooperative and mutually beneficial

relationship between employers and employees, leading to increased employee satisfaction,
engagement, and productivity. It also promotes stability, fairness, and social harmony within the
organization and the broader industrial context.