UNIT V: Compensation

Concept

It is an exchange of employee’s effort or work, based on volume of time or value of production. Compensation is a
process by which employees will attract, motivate and retain competent labor in the orgn. Compensation includes all
forms of employees pay or rewards arising from the employment. Total compensation includes both intrinsic and
extrinsic rewards. Extrinsic rewards are pay, promotion, commission, benefits and working condition. These rewards
are necessary to fulfill lower order needs. In the absence of fulfillment of such need an employee may be dissatisfied
at the present job.

On the other hand, intrinsic rewards come from self fulfillment, responsibility, achievement and recognition. There
are higher order needs which is necessary to motivate employees of work to increase their commitment majority of
labor mgmt. dispute are due to compensation.

According to Milkavish “Compensation refers to all form of financial returns, tangible services and benefits
employees receive as part of an employment relationship”.

According to Byars and Rue, “Compensation refers to all the extrinsic rewards that employees receive in
exchange for their work. It is composed of the base wge or salary, any incentives or bonuses and any benefits”

According to Schuler, “Compensation is the activity by which orgn. evaluate the contribution of employees in
order to distribute fairly direct and indirect monetary and non-monetary rewards provided by the orgn.”

Employees look for rewards before they do anything. They need to be compensated for their efforts based on
time or production. Compensation refers to all forms of financial rewards received by employees. It arises from
employment. It occupies an important place in the life of the employees. It is a cost to the employees.

Process of employee compensation

It is very tough job for the orgn. to develop a perfect compensation program. Each plan has certain strong points
and some weak points. However, an orgn. attempt to establish a compensation program suitable to its business
strategy and to motivate people to achieve its strategy. For this purpose the orgn. needs work on the pay plan process
and pay system mechanism. The steps involved in determining pay system are as follows:

1.Job Analysis Wage

legislation

a. Job Description
Job 3. Analysis of
b. Specification 2. Wage Surveys 4. Wage/ Pay
Evaluation relevant
structure
organizational
problems
5. Rules for
Administration

Performance
Differential
Standard
employee appraisal

6. Wage payments
implementation
1. Performing job analysis: Job analysis has two major outcomes namely job description and job specification. After
this job is evaluated to determine the value relative to all other jobs in the orgn. The next step is that of providing
the job with price. This involves converting the relative job values into specific monetary values.
2. Conducting pay (wage/salary) surveys: In this step the actual amount of money to be paid is determined through
wage and salary surveys. The objectives of pay survey is to get information about the :
 How much other firms are paying?
 What are items included in social security?
 What is the level of pay offered by other firms for similar jobs?
That information is collected by:
 Benchmark jobs: Based on the relative price of this job, other jobs are compared to determine the relative pay
scales accordingly. These jobs are usually known as good indicators.
 Packaged surveys: Big companies also go through their own surveys for the purpose of pay structure.
3. Analysis of organizational problems: Determination of pay requires more than wage and salary surveys. Different
variables can affect wage structure. HR managers is interested in following queries:
 What should be the relationship between the pay structure and benefits?
 Would the firm recruit new employees after revised pay structure?
 Are the prevailing rates in industry consistent with the results of job evaluation?
 What will be the result of paying higher or lower compensation and so on?
4. Preparation of pay structure: For preparation of effective pay structure a lot of decisions need to be taken.
 Whether pay amount equal, or below the industry level?
 Whether there should be single rates and whether pay ranges should provide for merit increase?
 The number of width of pay grades and the extent of overlap.
 Which jobs are to be placed in each of the pay grades?
 Te actual money value to be assigned to various pay grades.
 Differentials between pay plan.
In reality there are no hard and fast rules for making such decisions.
5. Framing pay administration rules: As the rate ranges have been determined the development of rules or policies of
pay system has to be fixed. A lot of policies and rules are required to be looked after:
 A difference of seniority and merit basis.
 The frequency of pay increases.
 How to control salary and wage cost?
 The employees are to be informed of the details of pay program.
 Transparency and secrecy of the pay structure.
 The job is appraised and pay is fixe for the grade.
6. Implementation of wages and salaries: Finally, it should be implemented and controlled by authorized executives.
Due to the sensitivity of the pay system, it is usually assigned to a committee composed of high-ranking officers.
This committee may require frequent advice and help from HR staff. In general, the HR department may review
the whole implementation process. HR department must ensure the compliance with the established rules, policies
and pay structures.

Methods of employee compensation

There are various methods of compensation available in HRM literature and practice. A single orgn. may use a
combination of two or more methods at a time.
1. Base plus cost of living allowance: This method is based on two factors namely base and allowance. Every orgn.
has their base salary for all the types of jobs. On the above that employees are provided with cost of living
allowance. This method is an adjustment to the base salary by a percentage that is assumed to match increases in
cost for goods and services on a national regional or local level or account for changes in the market.
2. Scale plus cost of living allowances: This is the method of compensation used by many orgn. It also has two
components viz. scale level for a particular level of job plus the cost of living allowance. Many companies set a
range of pay rates, form minimum to maximum, designed for specific pay grade. On and above that a cost of
living adjustment/allowance is given to the employees as discussed in first methods.
3. Cash incentives: This method takes one of the two methods two above method. Again, the employee is given,
additional compensation to motivate and reward them for exceeding performance goals in the form of cash
incentives.
4. Bonus or variable pay: It is another method that is used by many of the orgn. to compensate their employee
according to their contribution. Bonus or variable pay plan is an incentive pay plan which awards employees
compensation, in addition to their base salary. It is given for achieving individual or group performance and
productivity goals.
5. Broad banding method: Broad banding means dropping salary grades and ranges into just a few wide levels
(bands) each of which contains a wide range of jobs and salary levels. For e.g. govt. of Nepal pay plan consists of
10 grades (class less 3 + non officers 3 + officers 4= 10), each with its pay range. For employees whose job falls
in one of these grades, the pay range for that grade decides their minimum and maximum salary.
6. Job or skill based pay method: This method has become very popular in recent years. It may be due to high
demand for skills experience and education trend in the market. In real sense it is a salary differentiation system
that bases compensation on an individual’s educations, experience, knowledge, skills and specialized training.
7. Merit pay method: It is also a very popular method of compensation used by majority of orgn. in recent days. Merit
pay is a compensation system whereby base pay increases are determined by individual performance.
8. Other forms of compensation: These techniques are only supplementary in nature than an established method.
Some e.g. are: awards program, team based pay and so on.

Job evaluation system

Concept

Compensation is one of the main part of the HRM activity. Thus, the compensation decision are influenced by
business plan, orgn. recruitment and selection policy, union mgmt. relation, HR planning, job Analysis and
performance appraisal. In other words, these are the input factor to evaluate a job in the orgn. Once information is
collected from the above source, the next important step is to evaluate jobs. This will be followed by pay system
mechanism.

It determines the relative worth of a job to the orgn. Compensation system should be designed around jobs. Job
and worker requirements affect pay structure and level. It helps to ensure internal equity.

Job evaluation is the output provided by job analysis. It is a process by which jobs in an orgn are appraised. It is a
process of analyzing and describing positions, grouping them and determining their relative value by comparing the
duties of different positions in term of their different responsibilities and other requirements.

According to Decenzo and Robbins, “By job evaluation, we mean using the information in job analysis, to
systematically determine the value of each job in relation to all jobs in the orgn.”

According to Wendell French, “Job evaluation is a process of determining the relative worth of various jobs within
the orgn., so that different wages may be paid to jobs of different worth”

In sum, the job evaluation system comprises of:

a) Collection of related information

b) Evaluation of job
c) Determining pay structure and pay level of each job.
This can be explained by following diagram:
 Job analysis

Recruitment and

Selection job Pay

HR planning evaluation Structure

Performance

Evaluation

So, job evaluation is the process of determining the relative, worth of the job. It is very useful in the establishment
of wage rate structure and in the elimination of wage inequalities. The information provided by the job analysis is
used to rank all jobs in job hierarchy.

Process of job evaluation

Job evaluation is only the starting points for establishing the relative differentiation of base pay rates. In the
process of job evaluation, the evaluator rates the job, not the man in the job. There are four steps in job evaluation:

1) Job analysis: Job analysis provides information through job description and specification. Using this source of
information, the evaluator can assess job duties and responsibilities and corresponding skills or knowledge
required.
2) Determination of compensable job factors: Once the process of job analysis is completed the next step is to
identify the main compensable factor. This factors are accountability, know how problem solving ability and other
physical demand as the job. This factors differ as per the job position.
3) Determining the relative importance of compensable factors: A determining compensable factors, the next step is
to assign the relative weight according to their importance. For a manager judgment and decision making abilities
are important and therefore more weights will be given to this factors where as for a physical worker, the ability to
handle weight is an important compensable factor and based on its importance.
4) Deciding about the job evaluator: The final step is to decide on who evaluate the jobs in the orgn. Only then the
question of choice of job evaluation method arises. A number of experts are available to evaluate jobs the policy of
job is made by the HR department whereas the method is selected by the team of job analysis comprising
supervisor, HR manager, industrial engineers and other job experts.

Methods of job evaluation

1) Ranking method: This is very simple and it ranks jobs in order of their difficulty from simplest to most complex.
Specialists review the job analysis information. They appraise each job and rank it in order of importance of relative
worth to the orgn. Each job is compared with others to determine the overall rank. A committee can also be
entrusted to do the job of ranking.
2) Classification (grading) method: This method is widely used in determining salaried jobs including those of govt. and
services occupation. Using this method, job Analyst categories jobs into various job groups known as grade or
classes. The highest grade may covers jobs requiring the manger to make the judgment and work in a challenging
job environment whereas the jobs which merely require workers to follow simple instruction under close supervision
are categories in the lowest grade.
Grade is a group of different jobs requiring similar skills, effort and responsibility. Each job is assigned a grade
common factor used for assigning the grades are responsibility, skills, and difficulty.
3) Point rating methods: This is also widely used job evaluation method where jobs are ranked on quantitative basis or
by assigning points, such points are assigned to compensable factors according to their importance. A quantitative
point scale is used to evaluate jobs on a factor by factor basis. It evaluates the compensable factors of each jobs. It
uses point instead of pay rates. Separates factors are scored to produce on overall point score for the job.
4) Factor comparison method: This method involves the ranking of different jobs in respect of certain compensable
factor and usually also involve the assigning of money wages to the jobs. This method directly leads to wage
determination. To determine pay using this method, compensable factors such as skills, mental and educational
requirement, responsibility and working condition are selected. Each of these factors is broken down into various sub
factors such as working condition, under different heading like temperature, dust and other inconvenience. The
ranking of jobs in respect of each of the factors and the subsequent fixing of wages which serve as a point of
reference for the later evaluation and ranking of the other jobs. Compared with other methods of job evaluation, this
method is more systematic.

Compensation structure

The compensation structures consists of sequence of pay ranges, each of which has a defined maximum and
minimum. Once the job evaluation is complete, its data become the centre for the development of the orgn.’s
compensation structure. This means establishing pay rates or ranges that are compatible with the ranks, classification
or points arrived at through job evaluation. The compensation structure for a job’s determined by:

a) Ranking through the evaluation process.

b) Market rates for similar job found by wage and salary survey.
c) Creation of job grades. A pay grade comprises of jobs of approximately.

Any of the four job evaluation methods can provide the necessary input for developing the orgn. overall pay
structure. Each has its strength and weakness but because of its wide use. We will use the point method to show how
point totals are combined with wge survey to form wge curve.

1) Wage survey: Most orgn. use surveys together factual information on pay practices within specific communities
and among firms in their industries. This information is used for comparison purposes. It can tell mgmt. if the orgn.
wage are in line with these of other orgn. and incase where there is short supply of individual to fill certain position,
the higher wage can be fixed.
Many industry and employees association also conduct surveys and make their result available, but orgn.
can conduct their own survey and most large ones do. They collect information about average wage level for a
specific job entry level and maximum wage rates, overtime pay practices, vacation and holiday allowances the
number of pay periods and the length of the normal work day and work week.
2) Wage curve: When mgmt. arrives at point totals from job evaluation and obtains survey data on what comparable
orgn. are paying for similar jobs, the wage curve can be fitted to the data for e.g.:

Y
8.75
8.50
8.25
8.00
7.75
7.50
7.25
7.00
6.75
6.50
6.25
6.00
5.75
5.50
5.25

0 100 200 300 400 500 600 700 X

This e.g. assumes usages of the point method and plots point totals and wages data. A separate wage curve can
be constructed based on survey data. A complete wage curve tells mgmt. the average relationship between points of
established pay grades and wages based rates.
3) Wage structures: It is only a short step from plotting a wage curve to develop the orgn. wage structure. Jobs that
are similar in terms of classes, grades or points are group together. It can be explained by following figures:
 Y
7000 Grade
6
6000
Grade
5000 5
Point Grade
Grade
4000 0-100 1
4
100-200 2
Grade 200-300 3
3000
Wage rate

3 300-400 4
400-500 5
2000
Grade 500-600 6
2
1000
Grade
1
500
0 100 200 300 400 500 600 700 X

Point
The more important job is paid more and as individuals assume jobs of greater importance, they rise within the
wage hierarchy (i.e. each pay has a range). All the jobs in the same grade receive the same pay rates. In practice,
orgn. tend to design (compensation) pay structure with ranges in each grade to reflect senior in job and levels of
performance. The pay rates are fine tuned by developing pay ranges. Compensation structure should be reviewed
from time to time to adopt it to change in the environment and cost of living.

Components of compensation
Most of the orgn. structure their compensation package based on following component:
1. Wage and salary: Wage is the remuneration paid periodically to an employee or worker. Wages usually refer to the
hourly rate paid of such groups as production and maintenance employees. Whereas salary is paid in a monthly
basis to the employees.
2. Incentives: It is refers to all the plans that provide extra pay for extra performance in addition to regular salary and
wages. They are extra financial motivation. They are paid over and above the time rated remuneration. It is any
formal and announced program under which the income of an individual, a small group or all the employees of the
firm are particularly or wholly related to increased output.
3. Benefits: They are usually known as fringe benefits because they are offered by the employer to the employees as
a fringe (free of cost). They are supplements to wags received by employees at a cost to employers. The term
covers a number of benefits like:
 Pay for time not worked (holiday, leaves, paid vacation)
 Protection programs (insurance, pensions or gratuity)
 Executive benefits (telephone, security guards, newspaper)
4. Services and perquisites: In addition to the above compensations, orgn., also provide a number of services
(amenities and perks) that employees find desirable. These services are usually provided by the orgn. at no cost
or at a significant reduction from what might have to be paid to the employees. These services includes:
 Free or subsidized housing, fooding, work clothing, transportation facilities etc.
 Child care facilities (day care, nurseries etc.)
 Financial and legal services
 Purchasing services (company operated stores, discount, on company product and services)
 Recreational, social and cultural programs (sports, social clubs, parties, picnics, reading rooms etc)
 Educational, medical, outplacement services.
 Compensation

Extrinsic Reward
Intrinsic Reward (Monetary)
(Job Factors)

Direct
Indirect Compensation
Compensation

Protection Pay for time not Employee Services Basic Wages Performance
Program worked and Perquisites based pay

Employees benefit

Individual expect more than wage or salary from their employers. The amount of paid vacation, the number of sick
leave days and insurance and pension programs are factors that will influence whether applicant accept employment
with a given orgn. or once employed whether they continue working for that orgn. There is evidence that the
absence of adequate benefit and service can contribute to employee’s dissatisfaction and increased absenteeism
and turnover. A good benefit package is in some certain orgn. Thus, it is the subject of important to the field of HRM.

Generally, offering good benefits serve as a tool to attract and retain good employees. While simply offering
benefit is no guarantee that employees will stay with the orgn., the lack of benefit will surely cause some people to
leave. If an orgn. excepts to get the “best” than it must pay for the best.

Certain benefit must be supplied by the orgn. for its employees with a few expectation the hiring of any
employees will require the orgn. to pay security premium, employment compensation, worker compensation and
state disability premium. Hence, the payment of these costs by the orgn. provides the employees with financial
protection at retirement, termination or as a result of injury and it also provides benefit to the workers dependents in
case of his or her death.

When an orgn. designs its overall compensation program, critical area of concern is what benefits to provide.
Today workers expect more than just an hourly or salary; they want additional considerations that will enrich their
lives. These considerations are an employment setting is called employment benefits.

Employee benefits have grown in importance and variety over the past several decades. Employers realize that
benefits attract qualified applicants, affect whether applicants accept their employment offer or once employed, and
determine if they stay with the orgn. Benefits, therefore, are necessary components of an effectively functioning
compensation program. Nearly two-thirds of workers indicate that their benefits are an important reason as to why
they stay with their current employer and are satisfied with their jobs.

Types of benefit

1) Legally required benefit: Certain benefit must be supplied by the orgn. for its employees regardless of whether it
want to or not, with few exception, the hiring of any employees will require the orgn. to pay. Legally required
benefit are as follows:
i) Social security: The major source of income for American retires has been the benefit provided by social
security insurance. Social security insurance is financed by contribution and matched by the employer,
computed as a percentage of the employees earning.
 ii) Unemployment compensation: Unemployment compensation laws provide benefit to employees who are
without a job and submit an application for unemployment agency, who register for available work and who are
willing to accept any suitable employment offered them through their state unemployment compensation
commission. The point behind unemployment compensation is to provide an income to individual who have
lost a job though no fault of their own.
iii) Worker’s compensation: Every state currently has some types of worker’s compensation to compensate
employees or their families for death or permanent or total disability resulting from job related endeavors.
Federal employees and others not working within the states are covered by separate legislation.
iv) State disability laws: For some individual state disability law provide income supplement for short term illness.
This payment are designed to continue to provide a portion of income should an employees have an illness or
injury that prevent him or her from working beyond the period that would be covered under a sick-leave plan.
State disability plans are totally funded by employer contribution.
2) Voluntary benefit:
i) Rest periods: Particularly popular among office jobs and those jobs requiring heavy exertion, high repetition or
diligent concentration requiring break during the day to allow the workers to rest.
ii) Holidays: Certain numbers of days of the year are stipulated as paid holidays. Most orgn. define this days to
include the fourth July, labor day, Christmas say and new year. The number of paid holidays varies, but within
a relatively narrow range. Virtually all employees receive this benefit, usually 9 to 11 days holidays are
provided each year regardless of the employees length of service.
iii) Vacation: After employees have been with an orgn. for a specified period of time, they usually become eligible
for a paid vacations. Common practice is to relate the length of vacation to the length of tenure and job
classification in the orgn.
iv) Sick leave: Most orgn. provide their employees with pay for days worked because of illness. Sick leave is
allocated on the basis of number of days in a year, accured a cumulative basis or expanded relative to year of
service with the orgn.
v) Leave of absence: A miscellaneous category includes leave of absence for which pay is provided like,
educational leaves, jury duty, military service etc.
vi) Pension program: The pension programs represents a fixed payment other than wages, made regularly to
former employees for their surviving dependents. To quality employees are required to fulfill certain conditions
of employment for a specific length of time. It is calculated on the basis of base salary.
vii) Insurance: One of the most popular benefit offered to employees today is the provision of insurance like life,
health and accident. While life insurance is probably one of the oldest benefit offered, other method are life
insurance, accident insurance etc.
viii) Group life insurance: Group life insurance plans offer a distinct advantage to employees, low cost coverage
without a physical examination, whether the employees absorbs the full cost of the life insurance for
employees or whether it is shared between the employer and the employees the fact is that the plan cover a
large number of employees allow the insurer to provide coverage at low cost.

Incentive System

Incentive is direct compensation for performance. It link rewards to performance to enhance productivity. They are
generally monetary benefits paid to employees for outstanding performance. They are given in addition to wage and
salary. It can be based on individual, group or organizational performance. Incentives are variable pay linked to
performance.

According to Milton L. Rock “Incentives are variable rewards granted according to variations in the achievement of
specific results”

According to Wendell French “Incentives plans provide financial or non-financial rewards to employee who make
substantial contributions to organizational effectiveness”

In conclusion, Employees are linked towards higher productivity when pay is linked to performance and it motivate
high performer to stay with the orgn. incentives encourage employees to achieve specific organizational goals related
to profits, costs, quality etc. however, incentives may not be suitable for all types of jobs. Moreover, incentives are
time consuming to administer and labor unions generally oppose pay-for-performance.

Level of incentives

1. Individual incentives: It directly link rewards to the performance of individual employee. They reward individual
performance. The perquisite for such incentives is that individual performance should be measureable. In most
cases, the basic pay is guaranteed and the incentives represent additional compensation. Popular individual
incentive plans are as follows:
a. Piecework (piece-rate): This incentive plan is used for production workers. The compensation is based on the
number of units produced.
b. Commissions: This incentive plan is used for sales personnel. It is based on sales performance in terms of
values.
c. Bonus: This incentive plan is used for managerial and professional employees. It is one-time lump sum
payment for meeting a performance goal.
d. Managerial incentive plans: Incentive plans for managers generally take the form of cash bonuses for good
performance of the dept., division or orgn. as a whole.
e. Standard hour plan: This plan is the second most used incentive plan. In this incentive plan standards are
denominated in time per unit of output rather than money per unit of output. Tasks are broken down by the
amount of time it task to complete them.
2. Group Incentives: Reward is linked to the combine performance of a group of employees. It is used to where
output of individual employee cannot be measured and tasks are interdependent and require teamwork. All the
individual incentive plans-piecework, commission, bonus can be applied to group.
a. Production incentive program: In an orgn. there are many groups. It is useful to those orgn. which has number
of unit in the orgn. This make this plan effective manager must make sure that the operation and output of each
group are definable and measureable.
b. Department head incentive program: Instead of giving incentives to small groups, sometimes incentives are
given to the department head. It is generally based on the department’s contribution not on different groups in a
department. It is based on direct contribution only. The department head receives the incentive amount which is
later shared among all the members in that department.
c. Professional incentive program: This incentive is made for accountant, engineer, secretary, lawyer, PRO and so
on. The bonus incentive for these groups is based on either, i) the division return on assets ii) the company’s
return on assets.
3. Organizational Incentives: Reward is linked to the overall performance of the orgn. The goal is to direct the efforts
of the employees towards improving organizational effectiveness. All employees share the reward. The widely
used organizational incentives are:
a. Productivity gain sharing: Incentive is based on the productivity of the orgn as a whole. It allows all employees
to share in overall labor or production costs saving through bonus payment.
b. Profit Sharing: Employees share some portion of the orgn. profit. This method motivates employees to
contribute to organization’s profitability. It also provides a sense of ownership to the employees.
c. Suggestion plan: Employees are reward for providing useful ideas for improving organizational effectiveness.
d. Scanlon plan: It is one of the well-known orgn-level incentive systems. It emphasizes employer-employee
participation and sharing in the operation and profitability of the company. It is assumed that bonus incentives
encourage cooperation.
e. Gain sharing plan: It is a organization-wide pay plans deigned to reward employees for improvements in
organizational productivity. They generally include employee suggestion systems and focus on reducing labor
costs through employee suggestions and participation.
f. Employee stock ownership plan: It is popular among utilities and manufacturing concerns. Now days they are
also used different orgn to motivate executives and employees. Under this plan an individual can purchase
company stock. Stock is generally sold at discount or straight market value without the use of broker. Is is
common incentives offered to executives.
 Gain Sharing
Gain sharing are incentives plan that engage employees in a common effort to achieve productivity objectivity
objectives and share the gains. The incentive is linked to the overall performance of the orgn. This is a form of group
incentive plan in which employees divide productivity generated saving among worker and employees. The concept
of gain sharing is completely different from the concept of profit sharing. Gain sharing is the outcome of productivity
when profit sharing is based on the amount of profit figures. It requires:
a) A mgmt. philosophy emphasizing the role of employees.
b) Highly structured committee where employees are involved and can provide valuable suggestion.
c) A formula that computes and divides the productivity related saving.

Normally, a high level of co-operation between mgmt. and employees in any orgn. indicates the free flow of
communication, active participation and interaction of views and ideas. This will finally improve the productivity and
the gain for all employees as well as for employee. To implement a gain sharing plan in many orgn., it requires the
following steps:

a) Determine corporate objective to increase productivity.

b) Define specific productivity measures.
c) Determine the percentage of gain to be shared out of incremental gains.
d) Find a suitable formula to share productivity gain sharing among the employees.
e) Determine a motivating size of payment.
f) Pay in cash or stock.
g) Determine how frequently bonuses are to be paid.
h) Continue participating system in the orgn.

Types of gain sharing plan

1) Production gain sharing plan: In this system of gain sharing if a group exceeds the pre-determined objective of
goals in the production they will receive bonus.
2) Profit sharing: Under this plan, orgn. share profit with the workers. It boosts morale and co-operation of
employees. Labor relation improve labor turnover is reduced.
3) Cost-reduction plan: In this system, employees committees will provide new ideas for cost reduction. Employees
are rewarded by bonus payment for cost sharing.
4) Employee’s ownership: In this system, employees have an ownership stake in the orgn. If the employees
exceeds, the predetermined objective, the orgn. will allow the employees to buy share.

Employees Benefits and services

In addition to benefits, orgn. can offer a wealth of services that employees find desirable. These services can be
provided by the orgn. at no cost to employees or at significant reduction from what might have to be paid without the
orgn. support. The company picnic, the Christmas dance, reward banquets and the company golf are all example of
services that most large orgn’s and many small orgn. provide for employees, their spouse or their entire families.
Indirect and non cash compensation paid to an employee by the employing orgn. is called benefits and services.
Some are compulsory by law. It differs from orgn. to orgn. or industry to industry. The purpose of employee benefits
and services is to retain the employee and increase the economic security odf staff members. They are:

i) Company sponsored events: The motivation behind mgmt’s offering social and recreational program is to develop
cohesiveness among employees as well as commitment and loyalty to the orgn. For e.g. the orgn. sponsorship of a
team to compete in the community bowling league provide employees recreation, offers a diversionary outlet and
build espirt de-corps.
ii) Counseling services: Many firms provide a wide range of counseling services. This include financial counseling (for
e.g. how to overcome existing indebtness ). Family counseling, career counseling, outplacement counseling (for
helping terminated disenchanted employees find new jobs) pre-retirement counseling and legal counseling through
legal insurance plans.
iii) Cultural activities: In an effort to broaden the interest and assist in the overall growth of employees orgn. may
provide cultural benefit and such as free tickets to play or operate participation in a company create book club or
 creation and use of a company library. The cost of such benefit is usually minimal, yet they provide an opportunity
for the employees to grow and develop.
iv) Credit unions: Many orgn. have established credit unions to serve both the saving and lending needs of their
employees. Credit union usually lend money at rate that are competitive with or lower than these otherwise
available outside. They also assume marginally higher risks than will offer the benefit of payroll deduction. Deposits
is put into saving in credit union (called share account ) usually offer a higher rate of interest than that paid by
commercial bank on a passbook.
v) Housing: Orgn. also provide housing facilities where housing is scarce and costs are unusually higher where there
is a high risks in ownership may provide employees with the option of supported and supplemented housing.
vi) Subsidized child care: Today most of the orgn. provide subsidized child care services for working women.
vii) Elder care: With an aging population, elder care has become more of an issue for many employees. Elder care
benefits are important for much the same reasons as are child care benefits. The responsibility for caring for an
aging relative can affect the employee’s performance at work aging relative can affect the employees performance
at work.
viii) Other services: The list of services that an orgn. can provide its employees is only limited by the imagination of
mgmt. For e.g. retail store, free coffee, tuition refunds etc.

Incentives for Executive compensation

The pay of executives is merely a special case within the topic of compensation but it does have several twists
that deserve attention. Firstly, the base salary of executive is higher than those of low level manager or operative
personnel. Secondly, executives frequently operate under bonus and stock option that can dramatically increase their
total compensation. Finally executive receive perquisites or special benefit that other do not.

Executive compensation is divided into three sections:

1. Executive salaries: In the early 1980’s executive in the public service generally earned yearly salaries in the
$40000-$50000 range. Orgn. even provide more salary than this also why the ogrn. Provide such a huge salary for
executives? The answer is quite simple i.e. motivation and economics. In the economic terms, we know that top
manager is expected to demonstrate good decision making abilities. As a result, the supply of qualified senior
executives is scare and orgn. have bid up the price for this talent. They too much keep their salaries in line with the
competition or potentially lose an executive to another orgn. High salaries also act to motivate both top executive
and lower level managers. High pay encourages top-level manager to perform well in order to keep their jobs. But
high pay also acts to stimulate lower level managers to work hard so that they can someday move up the ladder to
“the big money”.
2. Financial compensation: Financial incentives like bonuses or stock option plans are the main supplemental
financial compensation:
a. Differed bonus: Much of this additional compensation is differed bonus i.e. the executive bonus is computed on
the basis of some formula usually taking into account increase in sales and profit. This bonus although earned
in the current period is distributed over several future periods.
b. Stock option: Stock option have been a common incentives offered to executives. They generally allow
executive to purchase at some time in the future, a specific amount of the employees company’s stock at a
fixed price. Under the assumption that good mgmt. will increase the company’s profitability and therefore the
price of the stock. Stock options are viewed as performance based incentives.
3. Supplemental non-financial compensation:
a) Perquisites: Executives are frequently offered a perquisites not offered to other employees. The logic of offering
these ‘perks’ from the orgn. perspectives, is to attract and keep good managers and to motivate them to work
hard in the orgn. interest.
In addition, to the standard benefit offered to all employees. Some benefits are reserved for privatized
executives. They range from an annual physical examination worth several hundred dollars, to interest free
loans of millions of dollars which can be worth $100000 a year or more popular perks include the payment of
life insurance premiums, club membership, company automobiles, liberal expenses accounts, supplemental
 disability insurance, supplemental retirement account, post retirement consulting contracts and personal
financial tax and legal counseling.
b) Golden parachute: Finally, a popular benefit that occurred to top executives in the early 1980’s was designed by
top executives as a means of protecting themselves if a merger took place. This parachute provides either a
severance (compensating) salary to the departing executives or a guaranteed position in the newly created
orgn.

Governmental regulation of Compensation in Nepal

Compensation mgmt. in Nepal is largely concerned with pay benefit and services. The role of direct
compensation is important compared to indirect compensation mgmt. is mainly legal fulfillment. Civil servants are
paid according to the provisions of the civil service act and regulation. Minimum wages and bonus is paid to the
worker and employees according to labor act.

In the private sector, the goal of compensation mgmt. is not only legal but to acquire and retain competent
employees. It also aims to motivate employees for higher performance. Till the advent of democracy in 1951,
employer unilaterally decides the wage rate. There is no uniformity in wage structure. Since 1966 wages committee
formed by the govt. has been fixing minimum wages for various categories of workers.

The pay level in Nepal is largely determined by marketing rates or legal provisions. Ranking through job
evaluation process is generally not done. Job grades are legally prescribed for civil service and public sector
enterprises. Job grades in public sector differ from orgn. to orgn., but govt. job grades and pay rates are taken as
points of reference for determining private sector grades and rates. The uncontrolled influence of Indian workers also
affects pay rates in Nepal. Legally gender discrimination is not allowed but employers avoid hiring female workers.
They generally pay them low rates of pay compared to male workers. This is prevalent in private sector
establishment. Following are the factor of compensation in Nepal:

1) Govt. Regulation: Govt. regulation largely affect human resources activities at orgn. level including the
compensation policy. Govt. regulation guide orgn. policy in regulating compensation in almost all countries. The
tools for compensation regulation largely affect human resource activities at orgn. level including the
compensation policy . govt. regulation guide orgn. policy in regulating compensation in almost all countries. The
tools for compensation regulation are:
i) Legal framework: this consists following laws:
a) Labor laws: It regulate the wages of workers. They deal with unions and labor relations. They are about:
Minimum wages: Minimum monthly, daily or hourly wages that must be paid regardless of the worth of job.
Minimum wages in Nepal are fixed by the govt.
Overtime payment: The rates of hours worked above the specified weekly hours are laid down. In USA, it
is one and half times the regulate pay roles.
Equal pay: Legal provisions ensure fair and equal treatment on the job or compensation. Gender based
discrimination in compensation is made illegal.
Provident fund, Gratuity , pension: Employees and employer contribution to employees provident fund are
also specified by law. In Nepal, it is 10% of gross salary for both the parties. The laws also make
provisions for the payment of gratuities and pension to employees on retirement or termination.
Bonus: The payment of bonus from the profit also specified by law. In Nepal, the bonus act has prescribed
by 10% of net profit as the limit for bonus payment.
Deduction: The deduction that can be made from the wages and salaries also regulated by law. Income
tax must be deducted at source by the employees.
b) Company Act : this regulates the salary of executives. In India the company act limits the amount for
payment of salary and allowances perquisites and commission to managerial personnel. The company Act
1996 of Nepal limit rewards to 5% of profit to company director.
ii) Institutional framework: the govt. regulations of compensation is also done by various regulatory institutions.
They can be:
a) Wage boards: They fix minimum wages, in Nepal minimum wages of labor and tea plantation of worker are
fixed by the wages committee formed by the govt.
 b) Tribunal: They provide decision of a divaction incase of wages disputes. The tribunal are formed by the
govt.
c) Department of labor ( Bureau of labor ): this is the govt. agency responsible for implementation of legal
framework related to compensation.
2) Minimum wages: Employees get at least minimum wages. The “committee on fair wages” observed that minimum
wage must provide not merely for the bare subsistence but also for the preservation of the efficiency of the
worker. So, minimum wage must also provide some sort of education, medical, retirement and had
recommended that a fair and minimum wage must be paid to the workers. But inspite of discussion, wage or
minimum wage. The committee on fair wage or minimum wage after examining the various definition of a fair
wage concluded that ‘one of the various definition of a fair wage wage could be applied to Nepalese condition’.
The committee therefore evoled it’s own concept of fair wage on the basis of minimum wage and living standard.

If collective bargaining is the heart of industrial relation then minimum wage is the starting point from
where other aspects of collective bargaining process are initiated. At present the debate on minimum wage in
Nepal is uncomfortably poised on employer’s claim to be “too high” and employees claiming it to be “too high” nor
to be “too low”. It is a statutory floor price of labor. They agreed that the the orgn. fair wage should not be lower
than the minimum wage and expressed the view that while the lower limit of a fair wage should not be, the upper
limit was set by the capacity of an industry to pay. This means that minimum wage depend not only on the
present position of Nepalese industry, bargaining power, union policy, govt. regulation and also its future
prospects.

Till the advent of democracy, employees and unilaterally decided wage rates. There are no uniformity in
wage structure. Since 1966 wages committee found by them has been fixing minimum wages for various
categories of workers.

Following table provide information about minimum w ages:

Minimum wages in Nepal(as per month)

Year Unskilled Semi- Skilled High Daily

skilled skilled wages
1965 110 137.50 206.25 309.38 -
1974 150 173 228 320 -
1980 250 280 340 440 8
1987 582 632 740 923 22
1992 1152 1200 1310 1500 40
1997 1800 1800 1960 2160 63
2000 2116 2166 2276 2466 74

3) Social welfare factor : Before we deal on the structure of benefits that one is entitled under the presents social
security arrangement in the formal sector of employment, it will be here to spare few words on how formal sector
of employment is organized in Nepal with 80% of the total labour force engaged in agriculture carried n mostly in
informal, unorganized and self employment in Nepal. A part from few programs t address the problems of
agricultural labour’s have been left from the amount ambiguity of social security.
Recently the employment outside agriculture sector is increasing. The share of agriculture labour force has
declined by 10% point from 91% in census 1981 to 81% in census 1991. This is also marked by the huge
increase in the proportion of wage earning worker from about 9% in 1981 to over 21% in 1991.
Public sector is still the largest sector for formal employment opportunity in public sector/service constitute
civil service, police and army service, public schools and universities of state owned enterprises has total
organized has total figures of about 37,6,000 which is 44%of total organized sector employment.
One estimates shows that around 4,71,000 working in private sector enterprises. This gives us the total of
8,4,8,000 as organized sector employment.
Two legislation namely civil service Act and labour Act provide a basic farmewrk for social security provisions
in the public service and in private sector.
 a) Civil service act has provided the following compensation system for civil for civil servant.
 Pay and allowances as prescribed from time to time.
 Medical expenses equivalent to
 12 month salary for gazette officers over the service tenure
 18 month salary for non-gazette officers over the service tenure
 Pension and gratuity family in case of employees death
 Disability allowance as prescribed
 One month’s extra salary for dashain festival
 Life insurance coverage Rs 20,000 for gazette and Rs 12,000 for non-gazette employees
 Pension gratuity on retirement of the employees
 Payment in lieu of accumulated sick leave
 10% of salary as provident fund etc
b) The labour Act 1992 has prescribed the following compensation system for workers and employees:-
 Pay and allowance, minimum wages have been prescribed
 Welfare fun as prescribed
 Gratuity, provident fund, medical expenses as prescribed
 Leave and payment for specified accumulated leave
 Housing facilities by allocating 5% of gross profit
 Day care centers for the children of women workers prescribed.

The structure of social security benefits provided by the employers is as follows:-

i) Old age Benefits:- Pension and provident fund are the two most prominent forms of old age benefits. Pension is
applicable only in govt. service and in some public bodies and institution. There is no provision for pensions under
the labour Act. One significant aspect of social security benefits is provident fund, is only contribution benefit (50%
shared by the employees and 50% by employers) prevailing in Nepal.
In fact to the money despite, it carry 11% interest and partial with draw facility where and when necessary.
ii) Sickness allowances:- Paid sick leaves and medicare facilities are two other benefits that come under employees
sickness contingency. Civil servants enjoy better facility than the private sector. Employees in both in term of paid
sick leaves and medicare facilities. The employees were entitled to have maximum of 30 to the minimum of 12 day
sick leaves while the labourer range is between 15 days to 75 days.
iii) Work Injury:- Here again benefits provided for the civil servants for out weight 6 the provision made in the labour
act. Overseas treatment provison is being made for he civil servants. Under the labour act the maximum the
employees can claim for is the 100% compensation of the medical expenses plus paid sick leaves. The regulation
is silient overseas medical treatment.
iv) Work Accidents :- Work accidents, claims involves medicare plus paid leaves. However in the civil services where
there is the termination of the job due to accidents, there is the provision for pension plus an lump sum payment of
$10,000. As per the labour act the maximum and employees can claim for 5 years salary. In case of death due to
work accident there is the provision for pension plus some other lump sum payments. However under labour
regulation of the dead workers may be given a priority of employment in the company concerned.
v) Maternity allowances:- Paid maternity leave of two month in civil service and 52 days under labour regulation can
be claimed only for two surviving children. This is applicable to female worker only.
vi) Voluntary retirement :- Where a permanent employees decided to separate earlier from the work, he/she is entitled
to have lump sum gratuity calculated on the basis o f no. of years of service. Here private sector employees have
some preferential treatment. In the civil service, on an employee completing five years of service is entitled to have
gratuity while it si three years as per the labour regulation.
vii) Survivor Benefits:- A provision has made in the civil service to allow survivor benefit of Rs 40,000 to peons, Rs
50,000 to non gazatted officers and Rs 75,000 to gazatted officers in case on employees dies during hi/her tenure.
4. Incentive Compensation:- Incentive compensation in Nepal tend to be:-

 Piece rate bonus and commission is used for individual incentives based on performance.
 Bonus is used for group and organizational incentives. The labour act has limited the payment of bonus at 10%
of net profit.
 5. Provision of Retirement program
In the past social security was the single largest source of income for retired worker. Most of the public sectors
today however rely on some form of pension program to cover their financial needs in retirement. Many workers in
the private sector also have their social security benefits supplemented through private pension program which are
operated through their employers.
A retirement programs represents a fixed payment other than wage and made regularly to farmer or their
surviving dependents. To qualify employees are required to fulfill certain conditions of employment for a specific
length of time. The most popular method for determining the amount of an employees pension is base payment on
a percentage of the employee’s earning usually computed on an average over several years multiplied by the
number of years employees has been employed by the orgn. The next popular method is one in which payment is
based on same percentage of the employees is income usually for a particular period of time.
Pension is expensive benefits for orgn. to provide but are necessary if orgn. are to attract and keep valuable
employers. The inflation of the early 1980’s made it more important than ever for older workers to have some
assurance that their financial needs in their retirement year would be taken care of. However, there is little
evidence that employees are motivated by pension program. The reasons that pension plans are only remotely
tied to an individual performance specially for the worker under forty five year of age, pension must viewed as
membership based reward that are provided to develop loyalty.

Retirement benefit

Major retirement benefit of employees are as follows:

i. Social security: Most people assume that social security provides income only when they are over 62, but it actually
provides three types of benefits. The familiar retirement benefit provide if they retire at age of 62 or thereafter and
are insured under the social “security”, second are death benefit. This provide monthly payment to dependents
regardless of age at death, again assuming employees are insured under the social security act. Finally, there are
disability payment, this provide monthly payment to employees who becomes totally disabled (and their
dependents) if they work and meet certain requirement. The social security system also administers the Medicare
programs, which provide a wide range of health services to people 65 or above.
ii. Pension plan: Pension plan provide income to individual in their retirement and just over half of full time workers
participate in some type of pension plan at work. However, the actual rate of participation depends on several
things. For e.g. older workers tend to have a higher participation rate as much as three times as high as those in
small firms. Similarly, worker earning lower incomes are more at receiving little or no pension.

Pension plan can be divided into three basic ways:

a) Contributory versus non-contributory plans: The employees contribute to the contributory plan while the
employers make all contribution to the non-contributory pension plan.
b) Qualified versus non-qualified plans: There are certain tax benefits employer receives from contributing to
qualified pension plans. Such as tax deduction for contribution. Non-qualified pension plan gets less favorable
tax treatment for employees and employers.
c) Defined contribution plan versus defined benefit plans: Defined contribution plan specify what contribution the
employee and employer will make to the employee’s retirement or saving fund with defined contribution plan,
the person’s pension will depend on the amount contributed to the fund and on the retirement fund’s investment
earning.

Whereas defined benefit plans the employees knows ahead of time the pension benefits they will
receive. The defined pension benefits itself is usually set by a formula that ties the person’s retirement pension
to an amount equal to a percentage of the pension pre-retirement multiplied by the number of years she/he
worked for the company.
iii. Pension planning: It is complicated partly because of the many federal laws governing pension. For e.g.
companies (8 employees) usually want to ensure their pension contribution are “qualified” or tax deductable, so,
they must follows the pertinent income tax codes. The employee’s retirement income security act of 1974 restricts
what companies can, cannot and must do in regard to pension plan. In unionized companies the employer must let
the union participate in pension plan administration.
iv. Early retirement windows: Some plans take the form of early retirement window arrangement in which specific
employee’s are eligible to participate. The “window” means that for a limited time the company opens the
opportunity for employees to retire earlier than usual. The financial incentive is generally a combination of
improved or liberalized pension benefit plus a cash payment.

Emerging Concepts and issues in Compensation in Nepal

Several issues related to compensation and security has emerged over the year. The more important one’s how
orgn can provide compensation security and benefit to employees so as to retain and attract the probable employees
as the reduce employees turn over. The basic objective of pay plan is to establish and implement sound policies and
practices of employee compensation. It is concern with the financial aspects of needs, motivation and rewards.
There are following issue in compensation:-
i) Labour mgmt relation – Labour mgmt relation is the most important factor which affect in deciding the good
compensation package to employees. Recently the relation between labour and mgmt is not so cordial as in past.
In this competitive world, where you need good relation between mgmt and labour decreasing day by day. Due to
this relation, mgmt does not want to increase salary and other compensation in reply laour does not want to be
practicable and increase his productivity.
ii) Globalization and information technology: - Due to the globalization every company want to open the industries
every where the world only opening industries will not produce the products for that employees is needed not only
employees you need to give them good compensation package because due to information technology. even the
subordinate know prevailing working and compensating package provided by the other companies an orgn of
employees through regional ILO organization. Due to ILO the child labour exploitation have been reduced to
some extent.
iii) Union: - Russian revolution may have failed but its effect ie. Union of labour still exist. Union is the most important
factor that has strongly emerged over the year. Only the strong union can see and bargain for the good
compensation.
iv) Govt Regulation:- One of the most important issues while fixing and providing compensation and security to
employees is government regulation. Govt fixes the minimum wages and other benefit to employees. Govt does
not have any thought of gain from is so, it is not influenced by any other thing.
v) ILO (International Labor Organization): ILO in recent year has taken active participation in fixing of compensation
and security of employees through regional ILO orgn. Due to ILO the child labor exploitation have been reduced
to some extent.
vi) The issue of minimum wages: Due slow industrial and economic growth there is always excess of labour supply
over its demand. Therefore, the bargaining power of wooers is in Nepal is very low. The minimum wages provided
to the workers in Nepal is considered to be very low considering the inflation rate. It is lowest in South Asia.
vii) The issue of comparable worth: It refers to the requirement to pay equal wages for jobs of comparable value to
the employer. For e.g. women who are performing jobs equal to men’s be paid same as men? This is the basic
issue in comparable worth. In Nepal govt. and semi-govt. orgn. are trying to establish equity in compensation. But
most of the private orgn. are not able to pay equally. There is intentional discrimination even for same jobs.
viii) Issue of pay secrecy: One challenge facing HRM concerns the availability of information about the remuneration
to employees. Most private companies in Nepal try to maintain pay secrecy. This is done to avoid comparison
among employees. The practices regarding the pay secrecy are as:
 Govt. orgn., pubic enterprises and firms in the organized sector disclose full information about wages and
salaries.
 Family run private firms prefer pay secrecy.
 A policy of open pay can improve employee’s satisfaction with their pay and effort.
ix) The issue of inflation and salary compression: All orgn. face this issues in their pay plan. Many orgn some sort of
allowances for inflation in their salary. But most orgn. do not adjust their compensation package yearly according
to the rate of inflation declared by NRB.
x) Issue of cost of living differentials: Cost of living criteria are usually regarded as an automatic minimum equity pay
criteria. Different city and locality has different standards of cost of living index. This has created a serious
compensation problem in Nepal. For e.g. ,a family of four members might live in terai region for just 15000 per
month. But the same family monthly expenditures in Kathmandu or Pokhara would be over Rs 20000. What
happens to the employee who is transferred from Bhairahawa to Pokhara. The issue of cost of living is standing
issue in Nepal.
xi) Issue of pay review: Pay must be reviewed and changed from time to time. But how frequent and when becomes
a relevant issue. Pay reviews may be made on predetermined dates. In Nepal coping with inflation is the biggest
hurdle to overcome in a merit pay plan. The pay review system in Nepal is based on Mercy of Political leaders
and employers rather than system based.
xii) Issue of employee participation: When employees are not involved in designing pay plan, they exhibit high
resistance in accepting it. Therefore, the pay plan committee must incorporate employee representative. Pay plan
developed by a such committee motivates employees then a pay plan imposed by the govt./ mgmt. But it is rarely
practiced in Nepal.

End of Chapter