Compensation Management

In layman’s language the word ‘compensation’ means something, such as money, given or
received as payment for service. The word compensation may be defined as money received
in the performance of work, plus the many kinds of benefits and services that organization
provides their employee. It refers to wide range of financial and non-financial rewards to
employee for their service rendered to the organization.
It is paid in the form of wages, salaries, special allowance and employee benefits such as paid
vacation, insurance, maternity leaves, free travel facility, retirement benefits etc.

According to Wendell French,” Compensation is a comprehensive term which includes

wages, salaries and all other allowance and benefits.”
Wages are the remuneration paid for skilled, semi-skilled and unskilled operative workforce.
Salary is the remuneration of those employees who provides mental labour to the employer
such as supervisor, office staff, executive etc wages are paid on daily or hourly basis whereas
salary is paid on monthly basis.

Objectives of Compensation Planning

A sound compensation structure tries to achieve these objectives:

 To attract manpower in a competitive market.

 To control wages and salaries and labour costs by determining rate change and frequency

of increment.

 To maintain satisfaction of employees by exhibiting that remuneration is fair adequate and

equitable.

 To induce and improved performance, money is an effective motivator.

a) To Employees:
i. Employees are paid according to requirement of their jobs i.e highly skilled jobs are paid
more compensation than low skilled jobs. This eliminates inequalities.
ii. The chances of favouritism are minimised.
iii. Job’s sequence and lines of promotion are established wherever they are applicable.
iv. Employee’s moral and motivation are increased because of the sound compensation
structure.

b) To Employers:
i. They can systematically plan for and control the turnover in the organization.
ii. A sound compensation structure reduces the likelihood of friction and grievance over
remunerations.
iii. It enhance an employee morale and motivation because adequate and fairly administrative
incentives are basis to his wants and need.
iv. It attracts qualified employees by ensuring and adequate payment for all the jobs.
v. In dealing with a trade union, they can explain the basis of their wages programme because
it is based upon a systematic analysis of jobs and wages facts.

Factors Affecting Compensation Planning

a) Supply and Demand of Labour: Whatever the organization produces as commodity they
desire services and it must pay a price that of workers acting in concert. If more the labour is
required, such as at war time prosperity, there will be tendency to increase the compensation;
whereas the situation when anything works to decrease the supply of labour, such as
restriction by a particular labour union, there will be a tendency to increase the compensation.
The reverse of each situation is likely to result in a decrease in employee compensation,
provided, labour union, ability to pay, productivity, government do not intervene.
b) Ability to Pay: Labour Unions has often demanded an increase in compensation on the
basis
that the firm is prosperous and able to pay.
c) Management’s Philosophy: Management’s desire to maintain or improve moral, attract
high calibre employees, reduce turnover, and improve employee’s standard of living also
affect wages, as does the relative importance of a given position to a firm.
d) Legislation: Legislation related to plays a vital role in determining internal organization
practices. Various acts are prescribed by government of country for wage hours laws. Wage-
hour laws set limits on minimum wages to be paid and maximum hours to be worked. In
India minimum wages act 1948 reflecting the wage policy for an organization and fixation of
minimum rates of wages to workers in sweated industries. In 1976 equal remuneration act
was enacted which prohibits discrimination in matters relating to remuneration on the basis of
religion, region or gender.

Various Modes of Compensation

Various modes of compensation are as follows

a) Wages and Salary- Wages represent hourly rates of pay and salary refers to monthly rate
of pay irrespective of the number of hours worked. They are subject to annual increments.
They differ from employee to employee and depend upon the nature of jobs, seniority and
merit.
b) Incentives- These are also known as payment by results. These are paid in addition to
wages
and salaries. Incentive depends upon productivity, sales, profit or cost reduction efforts.
Incentive scheme are of two types:
 Individual incentive schemes.
 Group incentive schemes.
c) Fringe Benefits- These are given to employees in the form of benefits such as provident
fund, gratuity, medical care, hospitalization, accident relief, health insurance, canteen,
uniform etc.
d) Non- Monetary Benefits- They include challenging job responsibilities, recognition of
merit, growth prospects, competent supervision, comfortable working condition, job sharing
and flexi time.

Incentives
Incentives are monetary benefits paid to workmen in lieu of their outstanding performance.
Incentives vary from individual to individual and from period to period for the same
individual. They are universal and are paid in every sector. It works as motivational force to
work for their performance as incentive forms the part total remuneration. Incentives when
added to salary increase the earning thus increase the standard of living. The advantages of
incentive payment are reduced supervision, better utilisation of equipment, reduced scrap,
reduced lost time, reduced absenteeism and turnover & increased output.
According to Burack & Smith, ―An incentive scheme is a plan or programme to motivate
individual or group on performance. An incentive programme is most frequently built on
monitory rewards (incentive pay or monetary bonus), but may also include a variety of non-
monetary rewards or prizes.

Kinds of Incentives
Incentives can be classified under the following categories:
1. Individual and Organizational Incentives
2. Financial and Non-Financial Incentives
3. Positive and Negative Incentives

1) Individual and Organizational Incentives- According to L.G. Magginson, ―Individual

incentives are the extra compensation paid to an individual for all production over a
specified magnitude which stems from his exercise of more than normal skill, effort or
concentration when accomplished in a predetermined way involving standard tools,
facilities and materials.‖ Individual performance is measured to calculate incentive
whereas organizational or group incentive involve cooperation among employees,
management and union and purport to accomplish broader objectives such as an
organization-wide reduction in labour, material and supply costs, strengthening of
employee loyalty to company, harmonious management and decreased turnover and
absenteeism.

I) Individual Incentive System is of two types:

a) Time based System- It includes Halsey Plan, Rowan Plan, Emerson Plan and Bedeaux Plan
b) Production based System- it includes Taylor ‘s Differential Piece Rate System, Gantt‘s
Task and Bonus Plan
II) Group Incentive System is of following types
a) Scanlon Plan
b) Priestman ‘s Plan
c) Co-Partnership Plan
d) Profit Sharing
Some important plans of incentive wage payments are as follows:

Halsey Plan- Under this plan a standard time is fixed in advance for completing a work.
Bonus
is rewarded to the worker who perform his work in less than the standard time and paid
wages
according to the time wage system for the saved time.
The total earnings of the worker = wages for the actual time + bonus
Bonus = 33.5% of the time saved (standard time set on past experience)
Or
50% of the time saved (standard are scientifically set)
Example: Time required to complete job (S) = 20 hours
Actual Time taken (T) = 15 hours
Hourly Rate of Pay (R) = Rs 1.5
Calculate the wage of the worker.
Solution: T X R + (S-T) X R
2
15 X 1.5 + (20-15) X 1.5 = 22.5 + 3.75 = 26.25 Rs
2
In this equation 3.75 Rs are the incentives for saving 5 hours.

Rowan Plan – Under this method minimum wages are guaranteed given to worker at the
ordinary rate for the time taken to complete the work. Bonus is that proportion of the wages
of the time taken which the time saved bears to the standard time allowed.
Incentive = Wages for actual time for completing the work + Bonus where,
Bonus = T X R + (S-T) X T X R
S

15X 1.5 + (20-15) X 22.5 = 22.5 + 5.625 = 28.125 Rs

20
Emerson Plan – Under this system, wages on the time basis are guaranteed even to those
workers whose output is below the standard. The workers who prove efficient are paid a
bonus. For the purpose of determining efficiency, either the standard output per unit of time
is fixed, or the standard time for a job is determined, and efficiency is determined on the basis
of a comparison of actual performance against the standard.
Under this plan both – standard work or and daily wage earners get fixed Bonus on the
efficiency of workers. The moment workers efficiency reaches 67% he/she become entitle to
get the premium (bonus). The rate of bonus goes on increasing till he/she achieves 100%
efficiency. Beyond 100% efficiency, bonus will be 20% of the basic rate plus 1% (one
percent) for each 1% increase in efficiency. Thus at 120% efficiency a worker gets a bonus of
40% and at 140% efficiency workers gets 60% of the daily wage as bonus.

Bedeaux Plan – It provide comparable standards for all workers. The value of time saved is
divided both to the worker and his supervisor in the ratio of ¾ and ¼ respectively. A
supervisor
also helps a worker in saving his time so he is also given some benefit in this method. The
standard time for each job is determined in terms of minutes which are called Bedeaux points
or B ‘s. each B represents one minute through time and motion study. A worker is paid time
wages up to standard B ‘s or 100% performance. Bonus is paid when actual performance
exceeds standard performance in terms of B ‘s. ie. The worker receives, in addition to hos/her
hourly rate, a bonus equal to 75 percent of the number of points earned, in excess of 60 per
hour, multiplied by one sixtieth of the worker’s hourly rate.
Standard B’s = 20X60 = 1200
Actual B’s = 15X60 = 900
B’s saved = 300
Bous = 75/100 X 300X1.5 = 5.625 Rs.
60
Total earning = 22.5 + 5.625 = 28.125 Rs.

Taylor’s Differential Piece Rate System - F.W. Taylor, founder of the scientific
management
evolved this system of wage payment. Under this system, there is no guarantee of minimum
wages. Standard time and standard work are determined on the basis of time study. The main
characteristics of this system is that two rates of wage one lower and one higher are fixed.
Those who fail in attaining the standard, are paid at a lower rate and those exceeding the
standard or just attaining the standard get higher rate. Under this system, a serve penalty is
imposed on the inefficient workers because they get the wages at lower rates. The basic idea
underlying in this scheme is to induce the worker at least to attain the standard but at the
same time if a worker is relatively less efficient, he will lose much. For example, the standard
is fixed at 40 units per day and the piece rate are 40 P. and 50 P. per unit. If a worker
produces 40 units or more in a day, he will get the wages at the rate of 50 P per unit and if he
produces 39 units will get the wages at 40 paise per unit for the total output.
Gantt’s Task and Bonus Plan - In this, a minimum wage is guaranteed. Minimum wage is
given to anybody, who completes the job in standard time. If the job is completed in less
time,
then there is a hike in wage-rate. This hike varies between 25% to 50% of the standard rate. A
worker who cannot complete standard work within standard time is paid only the minimum
guaranteed wage. A worker completing the standard work within standard time is paid fixed
time wage plus a bonus @ 20% of the normal time wage. If the worker exceeds to the
standard, he is paid a higher piece- rate but there is no bonus. The above-mentioned plans
indicate that incentive vary along with variation in earning with changes in performance and
output.

Thus, based on linkages between performance and incentive the various incentive plans may
be classified into the following four types: -
1. Incentives in the same proportion as performance.
2. Incentives varying proportionately less than performance.
3. Incentives varying proportionately more than performance.
4. Incentives varying in proportion that varies with levels of performance.

Profit Sharing – It is a method of remuneration under which an employer pays his

employees a share in form of percentage from the net profits of an enterprise, in addition to
regular wages at fixed intervals of time.
Kinds of Profit Sharing: According to Metzer there are following three categories of profit
sharing: -
1. Current profit sharing.
2. Deferred profit sharing.
3. Combination of the above two.
1. Current Profit Sharing: Under this scheme share of profit is paid to the employees in
cash/cheque or in form of stock (share) option.
2. Deferred: Share of profit is credited to the account of employees which is paid to the
employees at the time of his/her retirement or other kind of separation.
3. A part of the share of profit due to the employees is paid immediately in cash or cheque
and rest is credited to his/her account. In India mostly the employees get their share of profit
in the form of bonus which is governed by the payment of Bonus Act. 1965.
Co-partnership
In some sense co-partnership is the improved version of profit sharing under the scheme
employees get companies share (equity) on cash payment or get their bonus converted into
share. Thus, they become the part and parcel of the management or equivalent to
shareholders. Benefits
1. The company’s capital formation is facilitated.
2. The employees develop the sense of “belonging” and “ownness”. Hence, they contribute
their best to run the company in profit.
3. They do not think of going on strike/work-to-rule/slow-down. Slogan soughing and things
like these.
4. They get a very good amount as dividend at the time of retirement or other kind of
separation. 5. The incidence of turn over (leaving the firm to joint other company) also gets
minimised.
6. Cost of supervision gets reduced.
7. Employees get immensely benefited and feel proud of the company/firm.

Scanlon Plan
This scheme was propounded by Joseph N. Scanlon, a lecturer in Massachusetts Institute of
Technology in U.S.A. in 1973. The scheme is basically a suggestion scheme to minimize the
cost of co-operation. The employees are motivated to render suggestion how to reduce the
cost of operation/ production and to get the benefit of reduced cost and increased
productivity. Benefits:
1. A collaborative and co-operative attitude is developed among employees and managers.
2. Employees feel that their active participation in managerial decisions is honoured

2) Financial and Non-financial Incentives- Individual or group performance can be

measured in financial terms. It means that their performance is rewarded in money or cash as
it has a great impact on motivation as a symbol of accomplishment. These incentives form
visible and tangible rewards provided in of accomplishment. Financial incentives include
salary, premium, reward, dividend, income on investment etc. On the other hand, non-
financial incentives are that social and psychological attraction which encourages people to
do the work efficiently and effectively. Non-financial incentive can be delegation of
responsibility, lack of fear, worker ‘s participation, title or promotion, constructive attitude,
security of service, good leadership etc..

3) Positive and Negative Incentives- Positive incentives are those agreeable factors related
to work situation which prompt an individual to attain or excel the standards or objectives set
for him, where as negative incentives are those disagreeable factors in a work situation which
an individual wants to avoid and strives to accomplish the standards required on his or her
part. Positive incentive may include expected promotion, worker ‘s preference, competition
with fellow workers and own ‗s record etc. Negative incentives include fear of lay off,
discharge, reduction of salary, disapproval by employer etc.

Fringe Benefits
Employees are paid several benefits in addition to wages, salary, allowances and bonus.
These benefits and services are called ‗fringe benefits ‘because these are offered by the
employer as a fringe. Employees of the organization are provided several benefits and
services by the employer to maintain and promote employee ‘s favourable attitude towards
the work and work environment. It not only increases their morale but also motivate them.
These provided benefits and services forms the part of salary and are generally refereed as
fringe benefits.
According to D. Belcher, ― Fringe benefits are any wage cost not directly connected with
the employee’s productive effort, performance, service or sacrifice.
According to Werther and Davis, ―Fringe embrace a broad range of benefits and services
that employees receive as part of their total compensation, package pay or direct
compensation and is based on critical job factors and performance.
According to Cockman, ― Employee benefits are those benefits which are supplied by an
employer to or for the benefits of an employee and which are not in the form of wages,
salaries and time rated payments.
These are indirect compensation as they are extended condition of employment and are not
related to performance directly.

Kinds of Fringe Benefits

The various organizations in India offers fringe benefits that may be categorized as follows:
1) Old Age and Retirement Benefits - these include provident fund schemes, pension
schemes, gratuity and medical benefits which are provided to employee after their retirement
and during old age as a sense of security about their old age.
2) Workman’s Compensation - these benefits are provided to employee if they are got
ignored or die under the working conditions and the sole responsibility is of the employer.
3) Employee Security- Regular wage and salary is given to employee that gives a feeling of
security. Other than this compensation is also given if there is lay-off or retrenchment in an
organization.
4) Payment for Time Not Worked – Under this category of benefits, a worker is provided
payment for the work that has been performed by him during holidays and also for the work
done during odd shifts. Compensatory holidays for the same number in the same month are
given if the worker has not availed weekly holidays.
5) Safety and Health – Under this benefit workers are provided conditions and requirements
regarding working condition with a view to provide safe working environment. Safety and
Health measures are also taken care of in order to protect the employees against unhealthy
working conditions and accidents.
6) Health Benefits – Employees are also provided medical services like hospital facility,
clinical facility by the organization.

REWARD
Rewards serve many purposes in organisations. They serve to build a better employment
deal, hold on to good employees and to reduce turnover.
The principal goal is to increase people's willingness to work in one ‘s company, to enhance
their productivity.
Most people assimilate "rewards", with salary raise or bonuses, but this is only one kind of
reward, Extrinsic reward. Studies proves that salespeople prefer pay raises because they feel
frustrated by their inability to obtain other rewards, but this behaviour can be modified by
applying a complete reward strategy.

Types of rewards
There are two kinds of rewards:

▪ Extrinsic rewards: concrete rewards that employee receive.

o Bonuses: Usually annually, Bonuses motivates the employee to put in all endeavours and
efforts during the year to achieve more than a satisfactory appraisal that increases the chance
of earning several salaries as lump sum. The scheme of bonuses varies within organizations;
some organizations ensure fixed bonuses which eliminate the element of asymmetric
information, conversely, other organizations deal with bonuses in terms of performance
which is subjective and may develop some sort of bias which may discourage employees and
create setback. Therefore, managers must be extra cautious and unbiased.
o Salary raise: Is achieved after hard work and effort of employees, attaining and acquiring
new skills or academic certificates and as appreciation for employee’s duty (yearly
increments) in an organization. This type of reward is beneficial for the reason that it
motivates employees in developing their skills and competence which is also an investment
for the organization due to increased productivity and performance. This type of reward
offers long-term satisfaction to employees. Nevertheless, managers must also be fair and
equal with employees serving the organization and eliminate the possibility of adverse
selection where some employees can be treated superior or inferior to others.
o Gifts: Are considered short-term. Mainly presented as a token of appreciation for an
achievement or obtaining an organization desired goal. Any employee would appreciate a
tangible matter that boosts their self-esteem for the reason of recognition and appreciation
from the management. This type of reward basically provides a clear vision of the employee
‘s correct path and motivates employee into stabilising or increasing their efforts to achieve
higher returns and attainments.
o Promotion: Quite similar to the former type of reward. Promotions tend to effect the long-
term satisfaction of employees. This can be done by elevating the employee to a higher stage
and offering a title with increased accountability and responsibility due to employee efforts,
behaviour and period serving a specific organization. This type of reward is vital for the main
reason of redundancy and routine. The employee is motivated in this type of reward to
contribute all his efforts in order to gain managements trust and acquire their delegation and
responsibility. The issue revolved around promotion is adverse selection and managers must
be fair and reasonable in promoting their employees.

▪ Intrinsic rewards: tend to give personal satisfaction to individual Information /

feedback: Also, a significant type of reward that successful and effective managers never
neglect. This type of rewards offers guidance to employees whether positive (remain on
 track) or negative (guidance to the correct path). This also creates a bond and adds value
to the relationship of managers and employees.
o Recognition: Recognition: Is recognizing an employee ‘s performance by verbal
appreciation. This type of reward may take the presence of being formal for example meeting
or informal such as a ―pat on the back‖ to boost employees’ self-esteem and happiness
which will result into additional contributing efforts.
o Trust/empowerment: in any society or organization, trust is a vital aspect between living
individuals in order to add value to any relationship. This form of reliance is essential in
order to complete tasks successfully. Also, takes place in empowerment when managers
delegate tasks to employees. This adds importance to an employee where his decisions and
actions are reflected. Therefore, this reward may benefit organizations for the idea of two
minds better than one.
Intrinsic rewards make the employee feel better in the organization, while Extrinsic rewards
focus on the performance and activities of the employee in order to attain a certain outcome.
The principal difficulty is to find a balance between employees' performance (extrinsic) and
happiness (intrinsic).
The reward also needs to be according to the employee ‘s personality. For instance, a sports
fan will be really happy to get some tickets for the next big match. However, a mother who
passes all her time with her children, may not use them and therefore they will be wasted.
When rewarding one, the manager needs to choose if he wants to rewards an Individual, a
Team or a whole Organization. One will choose the reward scope in harmony with the work
that has been achieved.
 Individual
o Base pay, incentives, benefits
Rewards attendance, performance, competence
 Team: team bonus, rewards group cooperation
 Organization: profit-sharing, shares, gain-sharing