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Master of Business Administration-MBA Semester 4 MU0015 Compensation Benefits Assignment Set- 1

Q.1 Discuss the element of compensation? Ans:Compensation refers to money and money-related extras[2]. Thus, in addition to a persons base pay, compensation can include bonuses, merit increases, variable pay, and long-term Incentives. Benefits include the remaining things, such as healthcare, pension plans, stock options, and legal services. An organisations compensation program sends a message to employees about its commitment to encouraging, recognising, and rewarding employee performance. While money should certainly never be the only motivator, it is definitely important. To be successful, a compensation program must link employee performance with business performance. Employees have to understand what the company expects of them, why the company expects it and the possible rewards when performance expectations are met. Taking this approach in preparing the pay structure provides an ownership context for employees, knowing they are important to the ongoing success of the organisation, and that if they do their part well, they will share in the rewards generated by that success. Let us now look at some of the most common elements or components of Compensation and Benefits. Elements of compensation Let us first discuss the elements of compensation and later we shall discuss what goes into benefits. The primary elements of a compensation package are: Base pay: Base pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignment of a job. Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this, organisations must first identify their competitive market. This can be achieved by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Next, they need to conduct an assessment of market pay practices for similar jobs within the recognised competitor group. This assessment should involve the duties, skills, and impact levels of each job evaluated that is, each job of similar size and scope. Then a pay structure for managing the competitive base-pay levels for the jobs throughout the organisation should be developed. Pay structures typically consist of a series of pay ranges or bands that reveal competitive rates of pay for specific jobs, as well as allowing room for salary growth. Jobs of similar value from both the market point of view and an internal point of view are grouped together. Then a competitive pay range is developed around the market rates for the particular jobs.


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Variable pay: Performance-based variable pay continues to achieve momentum as a more successful way to identify and reward employee performance. Also known as pay-perperformance, variable pay is popular in todays corporate world. By including a percentage of variable pay in the compensation plan, organisations ensure that two people with different efficiency levels do not get the same benefits. By doing this, the company rewards productivity and hard work and motivates the under-performers to work hard. Once limited to senior management levels, these incentive or bonus plans are being redesigned to reward the achievement of specific company or employee performance objectives. In a variable pay plan, the size of the award varies among employees and from one performance period to another, based on levels of achievement measured, as well as against pre established company and employee performance targets. Amounts are usually calculated as a percentage of base pay depending on job category and position. Rewards are normally paid in cash on an annual, semi annual or quarterly basis depending on the plan design. Plan designs range from sales-commission types to individual incentive or bonus plans to team awards. The main idea of these programs is to reward innovation and hard work and to discourage mediocrity in performance. Skill and competency-based pay: Skill-based pay offers employees extra compensation when they have new skills specially recognised by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs but are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviours and personal attributes. It helps out employees to grow in the company and helps them to close the knowledge gaps needed for creative moves. Long-term incentive compensation: Long-term incentive compensation vehicles, such as stockoption plans and other deferred-compensation plans, which are not usually used to reward performance, are achieving desirability among employees. These long term incentive compensation plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are a common form of long-term compensation at public organisations. In most private companies, incentives that reflect stock plans are used for key employees. Long-term compensation plans can be valuable preservation tools for the success of an organisation. They help to focus on driving and improving the key employees to achieve the financial performance of the company over a longer term.


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Q.2 Explain the economic theories of wages? Ans:Economists view compensation as a labour market determinant. Economic theories specify the economic factors that determine employee compensation, the manner in which they do so, and the importance of each. Subsistence theory Subsistence theory, also known as the Iron Law of Wages was proposed by David Ricardo. According to this theory, employees should be paid towards their labour in producing goods so as to enable them to survive, thereby neither increasing nor diminishing the human race. In other words, wages cannot fall below subsistence level because without subsistence, labourers will be unable to work. On the contrary, if the compensation increases beyond the subsistence level, then the number of employees would also increase, because the employees will be in a better position to support larger families. This would then cause the compensation to fall due to the increased supply of labour than demand. When the compensation falls below the subsistence level, employees would die of hunger, malnutrition and diseases. Hence, the number of employees available for employment will come down, which, in turn, would push up the demand for labour. This increase in demand will push up the compensation beyond subsistence level. Differences in the statement of the subsistence theory of wages continued to arise, even from those who have been regarded as its reliable advocates. Malthus, basing his theory of wages on his theory of population, followed the supply and demand theory, advocating the restraint of marriages as a means of decreasing the supply of employees and thus raising the standard of wages. Malthus stated it as "that amount of those necessaries and conveniences, without which they would not consent to keep up their numbers."[1] Wages fund theory This theory was proposed by Smith. This theory assumes that every organisation has a fixed fund of capital to pay wages. The inventory of goods or capital is termed as the wages fund, and its source is the savings of the industrialists. Given the size of the labour force and the wages fund, the wage rate is determined as: Wage rate= wages fund/labour force. Surplus value theory This theory was proposed by Karl Marx (1818-1883). According to this theory, an employee was an article of commerce, which could be purchased on payment of the subsistence price [2]. The price of any product and the time needed for producing it was determined by an employee. An employee was not paid in proportion to the time spent on work, but was paid much less, and the surplus was utilized for paying other expenses. Residual claimant theory The residual-claimant theory states that, after all other factors of production have received compensation for their contribution to the process, the amount of money left over will go to the remaining factors like wages. Smith suggested this theory for wages, since he assumed that rent


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would be deducted first and profits next. Walker worked on a residual theory of wages and suggested that the shares of the landlord, capital owner, and industrialist were determined independently and subtracted, thus leaving the remainder for an employee in the form of wages. However, it should be noted that any of the factors of production may be selected as the residual claimant assuming that independent determinations may be made for the shares of the other factors. Marginal productivity theory According to marginal productivity theory, the rate of wages paid to the employees tends to be equal to the marginal net product of employees employed at the margin. This theory assumes that all units of the factors are homogeneous. The factors used can be continuously varied. This theory is based on the law of falling marginal returns. The theory shows that when the employment increases, the wages decreases. It is difficult to calculate the marginal productivity of a factor in most of the areas. It also assumes that the supply of factors is fixed. This theory is applicable only under perfect competition. Bargaining theory of wages Bargaining theory of wages was developed by Davidson. According to this theory, wages are determined by the relative bargaining power of workers, the trade unions and employers. When a trade union is involved, basic wages, benefits, job differentials and employee differences tend to be determined by the relative strength of the organisation and the trade union. A neoclassic competitive theory The neoclassic economic theory argues that it will be good if employees can choose their own wage benefits among various alternatives. Further, if employees are sufficiently compensated, then the economic welfare of society as a whole is increased. The basic idea for this argument is that employees can decide what is best for them. However, in matters of employee benefits, wages or compensation, there are several rules which define the range of choices.


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Q.3 Write down the characteristics of job design? Ans:Jobs where employees experience high level of job satisfaction should have at least one or more of the following characteristics: Skill variety: It enables an employee to move from one job to another at various points of time. This type of variation provides a change in both mental activities as well as in physical well being. Change in mental activity takes place through movement from one job to another and changes in the physical well being takes place through different body postures for different types of jobs. Task identity: This makes the employee to identify a task as a whole and complete, and hence enables the employee to take more pride in the result of that task. The most important benefit of this task identity is that it helps employees to measure their performance from overall goals and target achievement of the organisation. For example, enabling people to perform a job from start to finish. Task significance: This enables the employee to consider the task as contributing better results to society or a group over and beyond themselves. For example, manufacturing products which are eco friendly. Responsibility: This is derived from autonomy, as without being given freedom of self-decision, it is not possible to succeed. For example, increasing the degree of decision making and the freedom to choose how and when work is done. Feedback: Feedback is the main element that creates knowledge of results. This can be anything from production figures to customer satisfaction scores. The point is that the feedback offers information that once known, can be used to do things differently. For example, communicating the results of individuals work during performance appraisal.


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Q.4 Explain the different job evaluation approaches? Ans:Job evaluation is a technique designed to enable employees to guess the size of a job in relation to others. Job evaluation will establish the basis for an internal ranking of jobs. Let us understand how job evaluation relates to compensation design. A well planned job evaluation scheme provides the HRM with definite systematic and reliable data required for the determination of wage and salary scales. This implies that logical wage negotiation reduces the wage grievances and dissatisfaction with wage differentials, thereby, ensuring a fair treatment for each of the employees. Most importantly, job evaluation provides a logical basis for promotion. Following are some of the most important benefits provided by job evaluation: Reduced layout turnover. Increased output. Improved morale of employees. Reduced loss of time due to wage negotiation and disputes. Reduced complaints regarding wages. Reduced wage and salary anomalies. The two most common methods of job evaluation that are being followed are: Job ranking: In this method, jobs are taken as a whole and ranked against each other. Points rating: In this method, different aspects of the job such as education and experience required to perform the job are assessed and a points value awarded. The most well known points scheme was introduced by Hay management consultants in 1951[4]. This scheme evaluates job responsibilities by considering the three major factors: o Know-how. o Problem solving o Accountability. Some principles of job evaluation are as follows: Only those jobs which can be clearly defined and identified must exist and this should be described in job description. All jobs in an organisation should be evaluated using an agreed job evaluation scheme. Job evaluators should have a clear knowledge about the job.


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Job evaluation is concerned with jobs and not with employees. It is not the employee who is being evaluated.


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Q.5 List and explain the components of CTC? Ans:Cost to Company (CTC) is the amount that you cost your company. That is, it is the amount that the company directly or indirectly spends on you because of employing you. Components of CTC The following are the components of CTC: Basic. Dearness Allowance (DA). House Rent Allowance (HRA). Medical allowance. Conveyance allowance. Special Allowance. Vehicle Allowance. Incentives or bonuses. Leave Travel Allowance or Concession (LTA / LTC). Telephone / Mobile Phone Allowance. CTC includes the salary directly paid to the employees, the benefits directly attributable to the employees such as companys contribution to the provident fund, pension funds, medical insurance premium, life insurance premium, cost of loans offered to the employees, telephone expenses for mobile phone connections and land-line connections, benefits offered for visiting the home country or hometown and so on. It is important to note that even a lower CTC might mean a higher take home pay than an offer with higher CTC, if the other components are arranged differently. Similarly, you must not infer that with increase in salary or position, your pay as percentage of salary will increase/decrease. You have to assess each offer separately. Most companies usually talk in terms of CTC as the figures look more impressive. However, they are often misleading. You should carefully look at their offer and calculate yourself how much your take home pay will be. After all, all deductions are based on fixed percentages and you can easily arrive at the right figure. Even the company will guide you on this. Sometimes, even a lower take home pay may be beneficial if the other payments are made against vouchers/bills (for example, telephones, cars, refreshment, and so on). This will ultimately lower your tax liability. Hence you should look at both CTC as well as take home pay while negotiating. You also have to look at certain other criteria like work timings,


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number of holidays, employee centric schemes for further education, and so on. These factors must not be ignored even though you cannot put a money value to these factors. The total compensation includes the value of all the perks and benefits the employee is offered by the company in addition to the employees salary. Calculating the annual CTC is important from the employees and the organisations perspective. This helps the organisation ascertain the HR cost and the employees understand what they are being offered, as they can benchmark their CTC with other comparable organisations. Employees can decide on other job offers depending on the CTC. For employees to decide on other job offers, it is very important that they understand how the CTC is calculated. However, it is difficult to arrive at the CTC as many components of the CTC considered by the company may not be considered as a part of total compensation package. Therefore, to arrive at a comprehensive CTC value, organisations need to be careful and add all the components of compensation or their equivalent cash value.


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Q.6 Briefly explain the variable compensation? Ans:Innovations aim to align compensation with performance. Variable compensation is one such way to accomplish the same. Variable pay is the part of the employee compensation that varies with the organisations business performance. Variable compensation plans keep on increasing in their popularity. The growing popularity of variable compensation plans is driven by three factors. Variable pay is counter cyclical An organisation incurs extra cost of variable pay when performing well; yet the organisation that is performing is better placed to afford the extra cost. Organisations incur less cost when the business is not doing well and are less able to afford variable pay. In the past, organisations could only reduce employee compensation by reducing the number of employees (through layoffs). A variable pay system works well when the organisations business performance is equal to or better than the industry average. However, if the organisation is performing poorly while the industry is doing well overall, then a given employees total compensation (variable plus fixed pay) will be less than that of other companies in the industry, which could lead to poor morale and/or increased turnover. Direct link between the employee goals and the organisation goals If the organisation performs well, then the employees will earn more income based on their individual performance through variable pay. Thus the employee and the organisation enjoy mutual benefits. Heres where design of the variable pay system assumes importance. To be optimally successful, the employees must realise how individual performance can impact their companys performance and in turn their variable pay. Motivated employees help the organisation do well The most effective variable pay systems are those that have been based on an established team. The team goals have the advantage of peer influence, which can act as a very strong motivator. Let us look into the classic example of variable pay which is that of the sales commission in which the sales executive receives an award (usually expressed as a percentage of sales) for each sale closed by the sales executive. The more the sales achieved, the higher the total commission income for the sales executive and higher the revenue and profits for the organisation. On the other hand, if the sales executive fails to sell, the organisation does not earn adequate revenue, but at the same time the organisation does not also incur expenditure on sales commission. Thus with variable pay systems, the interests of the organisation are closely linked to the interests of the individual employee. This is in contrast to the traditional method in which the base salary represents fixed compensation. It is paid to the employees regardless of the organisations performance. The different forms of variable pay include:

NAME: PANKAJ KUMAR SHARMA Formal bonus or incentive plans. Profit-sharing plans. Lump-sum merit awards. Spot bonuses. Gain-sharing plans. Alternative pay. Stock plans.

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