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COMPENSATION & REWARD

 C/R possibly the most critical & strategic area of HRM  Employers perspective , Employees perspective,

Concept of compensation,
 An organization exists to accomplish specific goals & objectives
hence, hires employees. The individuals hired by the organization have their own needs. One is for money, which enables them to purchase a wide variety of goods & services available in the marketplace. Hence there is a basis for an exchange: the employee offers specific skill/behavior behaviors desired by the organization to meet its goals and objectives in return for money, goods, & / or services.  Sale of hands – brains – soul??

 Compensation emphasizes on fair- day‘s pay for fair

day‘s work.  Purely extrinsic – A quid pro quo contract All forms of financial returns and tangible services and benefits employees receive as part of employment relationship Cash- compensation –Base Pay, D. A. Short Term Incentives, Long Term Incentives (Equity Incentives)  Benefits – Income Protection, Allowance, work/LifeProtecting ones  Bonuses (attendance, performance based etc)  Shifts, Supplements.  Danger money/ Dirt money  Immediate focus  Trade – off between pay & efforts  Monetary contract

Compensation Dimensions Pay Work and Performance: Pay for work and performance includes money that is provided in the short-term (weekly, monthly, and annual bonuses/awards). • Pay for Time Not Worked • Disability Income Continuation • Differed Income • Spouse (family) Income Continuation: Life Insurance plans, Pension plans, social security, workers‘ compensation, and other related plans provide income for the families of employees when these conditions arise. • Health, Accident, and Liability Protection

 Income Equivalent Payments  Organizations Develop Compensation Policy

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Methods of Payment Time Rate System Payment by Results System Measured Day work Concepts of Reward

CONCEPT OF REWARD Money as a Motivator—Limited Role of Financial Rewards  Composite of all organizational mechanisms, and strategies used to finally acknowledge Employees‘ behavior & performance. It includes all forms of compensation, specially non- monetary, awards & recognition, training opportunities, promotions, assignments, working conditions etc.
 Located more in behavioral science  It part of broader strategies of enhancing loyalty, motivation & satisfaction  Encompasses career opportunities, job- securities, learning opportunities, achievement, recognition

 Economic incentives are becoming rights rather than rewards‖. So we must acknowledge that insufficient monetary rewards for performance can not be rewards for performance and can be compensated by good human relations.  If talent is an organization‘s most important asset, maximizing that talent is its most critical challenge. The challenge lies in issues relating to developing the skills to motivate people to perform at their best, making work meaningful and rewarding, fostering commitment & innovation, retaining top performers & improving their job performance today & giving them the edge they need to become the leader of tomorrow.

 More prospective in focus  To unleash latent potentials  To create sustained commitment  Psychological contract  ―Personal recognition can be more motivational than money‖ asserts Bob Nelson, author of 1001 Ways to Reward Employees (Workman Publishing, 1994). ―You can obtain from your employees any type of performance or behavior you desire simply by making use of positive reinforcement.

NON-FINANCIAL COMPENSATION SYSTEM

The non- financial compensation system contains many of the reward components that behavioral scientists have been describing for the past 50 years as critical for improving workplace performance. 1.Enhancing Dignity and Satisfaction from Work Performed 2.Enhace Physiological Health, Intellectual Growth, and Emotional Maturity 3.Promote Constructive Social Relationship with Coworkers 4.Design Jobs that Require Adequate Attention and Effort

5.Allocate Sufficient Resources to Perform Work Assignments 6.Grant Sufficient Control over the Jobs 7.Offer Supportive Leadership and Management

Designing Reward System
Whom to Reward?  Individual Employees  Teams  The Organization

What to Reward?
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Performance Organizational level Unit/Department level Speed and efficiency Loyalty Innovation

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Upholding values Technical Solution Learning Good Behavior Sense of Humor Teaching Publications Event Management

How to Reward?
Empowerment Recognition Career Growth Development Celebrating and Fun

ADVANTAGES OF C & R SYSTEM – A MANAGEMENT

PERSPECTIVE

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Attracting & retaining good performer Improving Individual & Corporate Performance Improving Motivation Clarifying job- role & duties Improving communication Reinforcing management control Identifying developmental opportunities Importance that job deserves (Status, Skill, Responsibility) Encouraging loyalty to the Organization Controlling cost Complying Govt.‘s Policies/ Laws Maintaining Co.‘s Image

Total reward system Total Reward System has both monitory and nonmonitory components, comprising incentives such as base- pay, variable pay, benefits, an exciting and challenging work environment the opportunity to work with excellent colleagues and leaders and industrial growth opportunity- the concept has been derived from Herzberg‘s theory of motivation- Hygiene factors + motivators
 Direct financial- Base-pay, variable –pay, incentives, stock options, Bonus, Merit increases, Spot-rewards, deferredpayment etc.  Indirect-financial- Benefits, Perquisites, non-cash-recognition, sabbaticals, Q.W.L-/Clubs, Co‘s paid holidays, children schooling, home-office, career-counseling etc.

Total Reward Model

Intangible Internal value Or motivation

• Quality of Work Intangibles (typically intrinsically valued) • Work/Life Balance • Inspiration/Values • Enabling Environment • Future/Growth Opportunity • Cars • Clubs • Physical Exams • Retirement • Health and Welfare • Time Off With Pay • Statutory Programs • Income Replacement • Stock/ Equity • Performance Shares Perquisites

Total

Benefits

Total

Tangible

Short-Term Variable Base Cash
Total Cash

Difference Compensation

Rewards where we can • Annual Incentive assign an • Bonus/Spot Awards objective dollar value • Base Salary • Hourly Wage

Long-Term Incentive

Total

R e m u n e r a t i o n

R e w a r d

Profit is the most important criteria  Scheme may use cash, or share  Gain sharing  Share office scheme  Employees share ownership plan  Higher software system offers a platinum stock option – no real share transfer, employers receives a cash payment equivalent to the rise in value of national stock  Incentive ………Non cash awards  Skill based pay allows employees to program through a range of grade  Broadband pay

Compensation system

Indirect compensation

Direct compensation

Protection programs Pay for time not worked Services & Perquisites •Medical insurance •Vacations •Recreational facilities •Care •Life insurance •Holidays •Financial planning •Disability income •Sick leave •Low –cost or free meals •Pension social security •Jury duty

Base pay

Merit pay

Salary

Incentive pay •Bonus •Commission •Piece rate •Profit sharing •Stock option •Shift differential

Wage

Deferred Pay •Savings plan •Stock purchase •Annuity

Emerging Trends
 Charles Handy- ―The new org equation for success is that profit & productivity are best created by half of the workforce, paid twice as well and producing three times as such.‖ This can be achieved through performance linked incentive and reward system.  Such a system works on a very simple promise- ―If you measure it, people will do it. If you measure it & pay for it, people will do it in spades. If what you measure matches corporate goals and strategies, the co. will be successful.‖

Best Practice Options
The New Pay* External market-sensitive based pay, not internal consistency Variable performance-based pay, High Commitment** - High wages: You get what you pay for
- Apply incentives; share gains, employee ownership - Participation and empowerment - Teams, not individuals, are base units - Smaller pay differences

- Risk-sharing partnership, not entitlement Flexible opportunities to contribute, not jobs Lateral promotions, not career path Employability, not job security Teams, not individual contributors

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- Enterprise wide information sharing - Training, cross-training and skill development are crucial - Symbolic egalitarianism adds value - Long-term perspective matter - measurement matters

The 3-P compensation concept

Position, the Person and the Performance
Pay for Position The focus of the Compensation policy translated into the width of the grade, in relation to Pay for Position. The width of the grade is the degree to which jobs of different size are included in the same grade. Therefore, a wide grade, in effect, reduces the emphasis on Position since many jobs of varying job sizes are encompassed in the same grade. In such instances, other factors, are such as person‘s capabilities or competency (i.e. Pay for Person) or an individual‘s achievement of objectives (i.e. Pay for Performance) will have a much greater impact on the total pay level than the grade level. Broad-banding is an example of this type of approach. By contrast, narrow grades emphasis positions sine a small increase in responsibility would lead to a promotion and an increase in grade. A grade width not only determines the overall importance of Position to pay but also can be used to vary the emphasis of the three pay elements-position, person, and performance at different levels of the organization.

Theoretical Dimensions—Economic & Behavioral
Economical Theory of Wages 1)Subsistence Theory- (David Ricardo):- This theory (1817) states that: ―The laborers are paid to enable them to subsist and perpetuate the race without increase or diminution.‖ 2)Wages Fund Theory—(Adam smith):- Wages are paid out of a pre-determined fund of wealth which lay surplus with wealthy persons—as a result of organization savings. 3)The Residual Claimant Theory (Francis A. Walker):- According to walker, there are four factors of production/ business activity, viz. land, labor, capital and entrepreneurship. Wages represent the amount of value created in the production, which remains after payment has been made for all these factors of production.

4)The Surplus Values Theory of Wages (Marxian):5)The Bargaining Theory of Wages (John Davidson) 6)Employment Theory (Supply and Demand Theory)

7) Competitive Theory 8)Behavioral Theory (a) The Employee‘s Acceptance of a Wage Level:- This type of thinking takes into consideration the factors, which may induce an employee to stay on with a company. The size and prestige of the company, the power of the union, the wages and benefits that the employee receives in proportion to the contribution made by him-all have their impact. (b) The internal wage structure (c) Wage and Motivators Limitations of Economic Theories

Behavioral (Motivational) Theories
(a) Content or Theories (b) (process) theories

Motivation Theories Content Theories

Maslow‘s Hierarchy of Needs
Herzberg‘s 2- Factor Theory

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Physiolo gical

Safety & Securit y

Belongi ng

Estee m

Self Actualization

Hygiene Factors

Motivator Factors

Need for achievement
Mc Clelland‘s 3Modes for Success Existence (E)

Need for Affiliation n Aff

Need for Achievement N Ach Need for Power N Pow
Growth (G)

Alderfer‘s 3- Level Hierarchy (ERG)

Relatedness (R)


Process Theory Assists in explaining & Promoting understand of human behaviour, why, How?

Vroom‘s Expectancy Theory M= E x U x I = Efforts Valence Outcome

Perceived probability of success

Perceived value of reward

Probability of receipt of reward

 Equity Theory When employees feel that what they give
(inputs) and they receive (outcomes) is similar to what others are giving and receiving, equity exists. Employee make comparisons to determine equity or fairness in various work situations. Equity Theory – When

 . Locke's Goal Achievement Theory
Understanding Requirements Setting Measurable, Specific & Acceptable Goals Recognizing Both Level of Difficult and attainment Kinds & Quality of Behavior to Achieve Goals (s)

Wages and Salary Administration at Macro (National )level
KEY CONSIDERATION The key considerations in Public Policy concerning wages/ salaries in India may be identified as following: a) To end exploitation and provide remuneration to capital and labor such that ―while in the interests of the consumers and the primary producers excessive profits should be prevented by suitable measures of taxation and otherwise, both will share the product of their common effort after making provision for payment of fair return on capital employed in the industry and reasonable reserves for the maintenance and expansion of the undertaking‖ (Industrial Policy Resolution, 1947).

b) To fix statutory minimum wages in selected industries and promote fair wage agreements in the more organized industries (industrial Policy Resolution. 1948). c) To ensure equal pay for equal work (Constitution of India). d) To provide for wage differentials. e) To regulate wages and salaries to eliminate/reduce undue disparities. f) To link remuneration to productivity. g) To compensate for the rise in cost of living. h) To determine fair wages over and above minimum wages with due regard to (i) the productivity of labor; (ii) the prevailing level of wages; (iii) the level of national income and distribution; and (iv) the place of industry in the economy of the country.

i) The capacity to pay. However, the Supreme
Court ruled that ‗an employer who cannot pay minimum wages has no right to exist‘. The capacity to pay becomes a subject of consideration to determine fair wages over and above the minimum wages. j) The basic needs of labor. (The 15th session of Indian Labor Conference held in 1957 suggested that the minimum wages be needbased). k) To secure a living wage for workers (Article 43, which is a part of the Directive Principles of State Policy of the Constitution).

Wage Concepts (Minimum Wages Concept)

Minimum wages And ILO
Need-based Minimum Wage Fair Wage Living Wage

Legal Framework
The Payment of Wages Act, 1936 The Minimum Wages Act, 1948 The Payment of Bonus Act, 1965 The equal Remuneration Act, 1976

Institution Mechanism For Wage Determination Unilateral Pay Fixation Collective Bargaining Wage Boards Pay Commissions

Industry‘s Compensation Policy (Micro-level)
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Principles for Compensation Policy Attraction and Retention Internal Consistency External Parity Capacity to Pay Pay for Performance Labor Costs and Productivity Cost of Living Merit and Seniority Progression Motivation

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Wages & Productivity Low wages and low productivity is suicide; Low wages and high productivity is exploitation; High wages and low productivity leniency; High wages and high productivity and/or value addition is ideal. Therefore, compensation requires to be linked with performance for competitive advantages. Concept Of Internal Equity & External Parity

Job Evaluation

- Job Analysis:- The process of examining the content of a job, breaking it down into it‘s task, functions, processes, operation and elements. Job Description:- Description of a job based on job analysis. Job Specification:- The statement of the content of the skilled required of the job. Job Grading:- Ranking of job as a result of job analysis. Job Classification:- Grouping jobs according to their worth. Job Assessment/ Job Pricing:- The ascription of a monetary value on the basis of job grading.

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Internal Consistency Work Relationships Within the Job analysis Organization

Job Description

Job evaluation

Job Structure

Rationale

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Favoritism by the supervisor/manager Pressures from employee groups/unions Scarcity of Skills Unsystematic approach to pay-structure

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Objectives Primary Objectives: To establish wage level of a plant To establish relative wage level in a plant To bring new jobs to their proper relative parity with existing jobs To facilitate wage negotiations

METHODS AND SYSTEMS OF JOB EVALUATION The methods and systems of Job Evaluation are divided in different categories which are as follows: A) Conventional: A variety of job evaluation systems are in use and all of them are modifications of four basic systems. These are the ranking system, the grading system, the factor comparison system, and the point system. All of them are similar to each other in certain respects and are applicable to all types of jobs at all levels. I Non quantitative Ranking method Classification method II Quantitative a. Points Rating method b. Factor Comparison method

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Ranking Method All the jobs in an organization are ranked in the order of complexity, responsibility and demands they make on the respective employees. Ranking of all the jobs is made easier by first identifying those that come at two extreme ends of the scale and locating the rest in the middle-region. Advantages: It is simples of all procedures. It is less time consuming. It leaves more room for unions to bargain disadvantages. Sometimes equal differentials are assessed to adjacent ranks None of the committee member is likely to be familiar with all jobs

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Classification Method This method is sometimes called as predetermined grading method. A limited number of job grades are established on the basis of knowledge about the existing jobs in the organisation. Each of these grades is defined in terms of general functions and qualifications required. This is followed by development of job descriptions, which briefly state the nature of duties of each job. These job descriptions are matched with the grades, and jobs are classified into one or the other grades. Advantages It is comparatively easier method. It is less time consuming,

Point Rating Method In this method the whole job is analysed through 5-8 factors and over 20-50 sub-factors based on requirements. These factors/subfactors are given points which totals out as the overall position of the jobs. Though it is not scientific it is systematic method. It is the most popular method in use today in judging the relative of worth of jobs factors.

Classification
Class A B C D E F Point ranges 140-190 191-240 241-290 291-340 341-390 391-& OVER

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Advantages It is the most sophisticated All the outcome is in hard fact number Factor Comparison Method The first task in applying this method is to select and describe clearly the factors to be used. The choice of factors is generally much more limited than in point rating. For manual workers, the following factors are generally recommended: Mental requirements; Skill requirements; Physical requirements; Responsibilities; Working conditions For clerical, technical and supervisory staff, all the factors mentioned above except working conditions are generally recommended.

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The factor comparison method involves the following steps: selecting benchmark jobs; ranking benchmark jobs by factors; allocating money values to factors; ranking the other jobs, and wage fixing

Advantage - Factor comparison method permits a more systematic comparison of jobs than the nonanalytical methods.

B) Innovative/Non-Conventional: These systems are quite innovative and use concepts of management decision making and related aspects as factors for establishing internal equity. These are: ■ Decision Band Method Here, type of decision to be made by the job is considered and placed in the applicable band. The Bands are: Band E - Policy Making decision i.e. Top Management Band D - Programming decisions i.e. by Senior Managers Band C - Interpretive decisions i.e. by middle managers Band B - Routine decisions i.e. by skilled operators on line Band A - Automatic decisions regarding when, how and where i.e. by semi-skilled operators Band O - Defined decision by unskilled workmen

Hay Plan
This is for managerial pay. It emphasizes on three critical factors:

1. Know-how 2. Problem solving 3. Accountability.

1.

Know-how:

Sum total of all knowledge and skills a) Practical experience, (functional expertise) specialized, expertise and technological depth b) Width of managerial knowledge c) Human relations d) Requirement of skills for motivating people. 2. (Mental Activity) The amount of original, self starting thought required by the job for analysis, evaluation, creation, reasoning and arriving at conclusion a) Thinking environment b) Challenging environment

Problem Solving:

3. Accountability:
The major effect of the job on the company goals – accountability for achievement. a) Freedom to act b) Impact on result c) Magnitude of success annually etc.

Pay Surveys Why Conduct a Survey?

1) Hiring & retaining Competent Employees 2) Recognizing Pay Trends in the Marketplace 3) Defending Pay Practices in a Court of Law
Data Collection Techniques
Telephone Mailed questionnaire Face-to-face –Interview Conference

Information to be collected
1. General information including:  name of the company  products manufactured  type of ownership  number of employees 2. Number of weekly and daily working hours, lunch and teabreaks. 3. Holiday – General paid holidays casual leave, earned or privilege leave, sick lave, etc. 4. Basic wages, scales of pay 5. Allowances – Dearness allowances, house rent allowance, city allowance, conveyance allowances, shift allowance, etc. 6. Incentives, bonuses, overtime payments. 7. Facilities such as conveyance, housing, children‘s education, free services like electricity, water, fuel, uniform, and canteen.

Pricing Jobs
A job’s relative worth is determined by its ranking through the job evaluation process and by what the labor market pays for a similar job.

Designing Pay Ranges And Banding
From internal consistency perspective, the range reflects the appropriate differences in performance or experience the employer wishes to pay for a given level of work. From an external competitiveness perspective, the range also acts as a control device. A range maximum sets the lead on what the employer is willing to pay for that work. The range minimum sets the floor.

Banding
It consolidates as many as 4 or 5 traditional grades into single band, with one minimum and another maximum. Because the band encompasses so many jobs of different values, a range midpoint is usually not used.

Salary structure
1) Graded salary structures 2) Salary progression curves
Basic Wage Dearness Allowance (DA) Allowances Overtime Payment Annual Payment Annual Bonus Incentive System Fringe Benefits Relationship between Contribution and Method of Remuneration

Kind of Contribution

Method of Payment For normal Contribution For extra Contribution
+ fixed Overtime wages wage+ through

1.Time 2. Skill

Basic wage allowance

Basic wage based on job Higher basic evaluation+ allowance allowance promotion

3.Effort

Basic wage based on job Incentive bonus and merit evaluation+ allowance increments Basic wage based on job evaluation+ allowance Basic wage based on job Higher basic evaluation+ allowance allowances Basic wage based on job Higher basic evaluation+ allowance allowances wage +

4 Ideas

5.Responsibility

6.Working condition

wage

+

7. Cooperation 8. Continue service

Continued payment of basic Incentive bonus wage + allowances Time sale basic wage increment in Promotion benefits. and fringe

Managerial Compensation Dispensation

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Variable pay linked with manager‘s performance Bonuses, profit sharing and stock options Social security benefits Better quality of work life and working life Facilities for entertaining customers Company recreational services Cost of education and training of the managers as well as a scholarship to their children and allowances for professional magazines and goods Free furnished accommodation, conveyance allowance, etc.

Recent Trends
The basic questions throw up a arrange of approaches for designing compensation packages:
(a) Job Content Related Compensation

The most traditional and still the most prevalent approach is to link the annual increment to the performance. The basic pay is a job specific range, which is wide enough to accommodate all levels of performance. The binding restriction is that the basic salary including cumulative annual increments remains within the prescribed jobspecific range.

(b) Performance Related Compensation An advance on the traditional approach has emerged in the form of combination of job specific basic pay, performance based annual increment and periodic incentive linked to individual or group performance. In this approach, the variable component of compensation based on individual or group performance is becoming more significant. The attempt here is to keep a significant part of the compensation package as a variable cost linked to performance and limit the fixed component represented by basic pay. The system allows the risk of business to be shared with employees.

(c) Competency Related Compensation The most recent development in the field of compensation has been to link basic pay to the hob holder competencies and not to the worth of the job or the performance of the employee against some quantitative targets. The approach is based on the premise that the possession of competencies that is critical to the strategic needs of the employer are a significant predictor of superior performance. This approach changes the focus from the compensation being retrospective to having a strong prospective component. In this approach, compensation is used to reinforce acquisition and demonstration of competencies in the performance of work that leads to the achievement of strategically significant results.

Broad Pay Bands The base pay structure that best serves a system of compensation based on competencies comprises a few broad bands. Each band has a sufficient range to accommodate pay steps from entry to a level where the employee acquires and demonstrates competencies for his promotion to the next band. Bands are fewer in number than traditional pay grades. There are two aspects of the linkages between competency levels and pay bands that deserve attention. Traditional Vs. Competency-based System

Reward Component
Basic Pay

Traditional System

Competencybased System

Based on internal job Based on competency levels evaluation and external market demonstrated by the employee survey comparison Represents one more year of Represents greater width and service depth an employee adds to his value to the core business processes Privilege of membership of the Share of the employee as a group partner in the success of the business

Basic Pay Progression

Variable Pay

Total cash compensation

What an employee is entitled to Amount he has actually earned under contact of appointment through contribution
Company decides as a matter . Employee‘s share for of policy undertaking risk and accountability as a business Collaborates

Benefits

Quality of Work Life

Does what an employee is told. Employee is empowered to His labour is important and not make decisions and use his his ideas mind an involvement

Career Opportunity

Job for life for loyalty

Employee and the employer are mutually responsible for career. Employer offers opportunity as business demands and employee has to keep his competencies in line with demand. per Share of success as a business partner

Total Reward

Based on contact

entitlements

Performance (‘Pay for results’)

Competencies (‘Pay for competencies’)

‗What‘ of performance
Quantitative measurement

‗How‘ of performance
More qualitative

Short time frame (usually Longer timeframe (future one year) performance) Result-oriented Development-oriented

Incentive Schemes/ Payment-ByResults (PBR)
TYPES OF INCENTIVE SCHEMES/SYSTEMS
Incentives schemes are many and varied. The International Labour Organisation (ILO) classifies all the schemes of payment by results into four categories. They are: Schemes where the workers‘ earnings vary in the same proportion as output Schemes where earnings vary less proportionately than output. Schemes where earnings vary proportionately more than output. Schemes where earnings differ at different levels of output.


Incomes Varying in Proportion to Output:

the

Same

The straight piece-work and the standard hour systems are the two popular incentive schemes which come under the first category. Straight piece-work method is the simplest, oldest and the most commonly used method. Here, the rate per unit of output is fixed, and the total earnings of a worker are arrived at by multiplying the total output (measure in terms of units) by the rate per unit.

Earning Varying Proportionately less than Output The Halsey System Bonus = ½ of Time Saved X Daily Wage of Time Taken

The Rowan System Under this system also a standard time is allowed for a job, and bonus is similarly paid for any time saved. This plan differs from the Halsey plan only in regard to the determination of the bonus. In all other respects, the two are the same. The premium is calculated on the basis of the proportion which the time saved bears at standard time. Thus, if a worker does work in six hours against 10 hours standard, the wages payable in six hours wages plus 40% of wages as bonus. Bonus = Time Saved x Time Taken x hourly rate Time Allowed

The Bedaux Point System Under this system, the standard time set is divided into a number of points at the rate of one minute per point. The bonus is calculated at 75 percent of the points earned in excess of 60 per hour. Thus if the standard time is 10 hours and if the worker completes the job in 7 hours and if his hourly rate is 0.96 money units the standard number of points for completing the job is 600 points in 7 hours. His bonus, therefore, will be 75 percent of 180 x 0.96/60 which is equal to 2.16 money units. If a worker does not reach the standard, he is paid at his time rate. This system is really more than the incentive system, since it enables the management to record the output of any worker of the department in units which show at one if the production is up to the standard the management desires.

Earnings Varying Proportionately More than Output Earnings Differing at Different Levels of Output Premium and Task Bonuses: It has been devised by H.L. Gantt and is the only one that pays a bonus percentage multiplied by the standard time. Under this system, fixed time rate are guaranteed. Out put standards and time standards are established for the performance of each job. Workers completing the job within the standard time or in less time receive wages for the standard time plus a bonus which ranges from 20 percent to 50 percent of the time allowed and not time saved. When a worker fails to turn out the required quantity of a product, he simply gets his time rate without any bonus. Its fairness and practical value depends on the reasonableness of the standard fixed and the wages which workers of average ability can earn without having to work at excessive speed and becoming unduly fatigued.

The Profit-sharing System: The profit-sharing scheme is based on the same principle as the group system where incentive is related to the collective effort of the group. It is an arrangement freely entered into under which an employer gives to his employees a share in the net profits of the enterprise, fixed in advance, in addition to their wages The Emerson’s Plan Under the Emerson‘s plan, a standard time is set for each job, and the efficiency of each worker is determined by dividing the time taken by the standard time. Up to 67 percent of efficiency, the worker is paid by time-rate. Thereafter, a graduated bonus, which amounts to a 20 percent bonus at 100 percent efficiency is paid to the worker. Thereafter, an additional bonus of one percent is added for each additional one percent efficiency.

The Scanlon Plan: The basic concept underlying the Scanlon Plan is that efficiency depends upon plant-wide co-operation. It has two main aspects: (a) adopting a measure for increased productivity; and (b) sharing the gain accrued from that increased productivity. Some of the Salient feature of the plan are:(a) it encourages group work; (b) there is high flexibility in the generation of decisions and execution of the plan; (c) it integrates the company‘s objectives with group activity; (d) it involves all the workers in the exercise and they make their maximum personal contribution to the process of production.

The Scanlon Plan© Today Today the Scanlon Plan is recognized as a system of total organisation development, which consists of assumptions about human behaviour, a set of principles for the management of organizations, and a participative process of implementation. It is a misconception to view the Scanlon Plan narrowly as an incentive system, quality of work life program, suggestion plan, paternalistic employee relations activity, or anti-union strategy. In fact, it is not a plan at all in the sense that it does not specify a mechanistic procedure to be followed in standardized fashion; no two Scanlon Plans are alike. Rather, it is a demanding process to achieve organizational productivity and human self-fulfilment. Through research and experience, four principles have been validated that define the Scanlon Plan and serve as conditions of Scanlon Plan success. .

 Identity: The continual process of clarifying and understanding

the organisation‘s ―mandate‖ (i.e. requirements to serve customers, owners/share-holders and employee). This process includes recognition and affirmation by the majority of employees of the need to change in order to manage physical and human.  Participation: Acceptance by all employees of the responsibility for the mandate and the opportunity to responsibly influence the decision-making process. Participation includes accountability for one‘s job and to all who have a vested interest in the enterprise.  Equity : the assurance of a fair and balanced return to customers (Product value, quality, delivery, fair price), owners (profitability, return on investment, growth), and employees (job security, competitive wages and benefits, sharing in productivity gains).  Managerial Competence: the unequivocal requirement of leadership to define the ―right job‖ to be open to influence, and to create a climate for productivity improvement. The identity, participation, and equity processes are demanding tests of managerial attitudes, abilities, and performance

The Rucker Plan The philosophy of the Rucker Plan is similar to the Scanlon Plan, but the bonus computed is based on a more sophisticated basis. There are two major differences between the two plans. The standard under the Rucker Plan is based upon a careful study of accounting records and is not considered bargainable. While the Scanlon Plan rewards only savings in labour costs, the Rucker Plan offers incentives for savings in other areas as well.

A major difference between the Scanlon, Plan and the Rucker Plan is the norm or base used to establish a measure of productivity. The Rucker Plan‘s measure of productivity is called economic productivity. It is the output of value added by manufacture for each dollar of input of payroll costs. Value added by manufacture is the difference between the sales income from goods produced and the cost of the materials, supplies, and outside services consumed in the production and delivery of that output. Payroll costs are all employment costs paid to, because of, or on behalf or the employee group measured. Accounting procedures similar to those used for developing the ratio in the Scanlon Plan are used to develop the economic productivity measures of the Rucker Plan. Incentives for indirect workers

Performance linked Compensation
What is Performance? Performance Management Employees performance depends on mainly three factors – skill, knowledge & motivation: Employees performance= f (SKM) Where; S= skill & ability to perform task K= knowledge of facts, rules, principles, & procedures M= motivation to perform

Variable pay Types of Variable Pay Plans

Individual
Piece rate

Group/Team
Gain sharing

Organizationwide
Profit sharing

Sales commissions

Quality improvement

Employee stock options

Bonuses

Cost reduction

Executive stock options

Special recognitions (trips, merchandise) Safety awards

Deferred compensation

Attendance bonuses


 

Benefits It encourage team work – because evaluation and reward systems are team based, participants reap immediate incentive benefits from team orientated performance; which in turn provides measurable improvements to company performance over the medium long term. It promotes open lines of communication – by focusing on the sharing of information, a variable pay ensures that all employees are able to make informed decisions, which streamlines operation and reduces cost. It‘s all about involvement – employees are regularly updated about progress, expectations, feedback and changes/deviations from the moment program design begins. Result – employees feel valued for their contributions; and organisation benefits from their motivation and enthusiasm. It shows the company is committed to positive change – shared vision and goals replace ―us and them‖ mentality.

 It aligns rewards with key business priorities – variable 
pay program is customized to bring about improved performance. The more efficient reward system, the more effective reward becomes as a ―Positive Reinforcer‖ It links compensation with profitability – variable pay program allows for a portion of each participant‘s salary to be performance based – so an organisation doesn‘t end up paying increasingly high salaries when it can least afford. It provides job stability – since variable pay links remuneration with profitability, a company facing tough times can decease the likelihood of retrenchments by reducing variable pay payouts. By doing this the threat to jobs of employees is lessened and they will be more willing to focus on their performance goals. Job stability creates trust, thereby increasing employee commitment to achieve those goals.

Fixed Pay Vs. Variable Pay Fixed Pay
Day to day performance responsibilities and

Variable Pay
ongoing Special objectives and results

Long-term contribution Skill/competency development and work style

Must be re-earned each year ―Above and Beyond‖ expected contributions

Successful team incentives CRM page no:- 154

Gainsharing – Gainsharing is a formula based organisation or factory wide bonus plan which provides for employees to share in the financial gains made by a company as a result of its improved performance. The Scanlon Plan – The Scanlon formula measures employment cost as a proportion of total sales. Standard ratio, say 50%, is determined and if labour costs fall below the proportion, the savings are distributed between employees and the companies on the basis of a pre-established formula. In other words, this plan calculates gains based on standard cost reduction. It relies on employees‘ participation through a system of committee, to solicit, develop, evaluate and implement suggestions of work unit.

The Rucker Plan – The Rucker plan is also based on employment costs. But they are calculated as a proportion of sales less the costs of materials and supplies (i.e. value added). Allen Rucker contended that the pay proportion of value added remains a near constant share unless the organisation suffers from severe mismanagement or a drastic change of policy. On the basis of this assumption, the Rucker plan determines a constant share of whatever added value is created by the joint efforts of management and employees. Improshare – Improshare is a proprietary plan, which is based on an established standard, which defines the expected hours required to produce and acceptable level of output. The standard is derived from work measurement. Any savings resulting from an increase in output in fewer than expected hours are shared between the organisation and employees by means of a pre-established formula.

In addition to the above, there are few other plans, which come under the purview of gain sharing. Value Added – Many versions of gainsharing are based on value added as the key performance measure. Value added is calculated by deducing expenditures on material and other purchased services from the income derived from sales of product. It is in fact the wealth created by people in business.

c) Goalsharing – Goalsharing plans are becoming increasingly popular. Even though goalsharing plans did not start becoming popular until recently, they many now be more common than gainsharing plans. In some ways they are similar to gainsharing plans; indeed, sometimes they are actually called gainsharing plans. However, they are significantly different in important ways and thus warrant a different name and separate consideration.

d) Profit Sharing – Profit sharing means paying employees a share of the net profit in addition to their wages or salary. It is payment of a dividend or a sum based on basic wage or salary, grade or seniority. It is supposed to be a stimulus for higher performance. Profit sharing is a plan under which an employer pays to eligible employees, as an additional to their normal remuneration, a special sum in forms of cash or shares in the company related to profits of the business. The amount shared is determined either by an established formula, which may be published, or entirely at the discretion of management. Profit sharing schemes are generally extended to all employees of the company.

e) Stock Options – Stock options are opportunities to buy stock at a set price immediately or sometime in future for a stated period. Stock options plan is one of the two forms of variable pay compensation package, other being profit sharing bonus. ESOP are becoming popular in view of the following factors: 1. The shift from industrial to information revolution. Knowledge workers expect say and stake in the organisation in which they work. 2. Public policy in many countries favour giving employees a share in equity and profits. This is pursued in few countries through legislation and in some others; it is encouraged through voluntary persuasion. 3. In the wake of disinvestments and privatization of public enterprises, employees are offered shares with view to ease their opposition. It is apparently to give them a stake. This is also considered as an effort as redistribution of wealth.

Legal aspect of Compensation
     Minimum wages act Payment of wages act Equal remuneration act Payment of bonus act Income tax act

 Principle of compensation
Equitable compensation systems
     Internal equity – through job evaluation methods External parity – market survey methods Job pricing Pay ranges Broad banding

Wage structure
Wage Differential  Fair Wages Committee  The degree of skill  The strain of work  The experience involved  The training required  The responsibilities undertaken  The mental & physical requirements  The disagreeableness of the task  The hazard attendant on the work, and  The fatigue involved. Wage component  Basic/ DA + variable pay + fringe benefits

Standard Pay Package
 Government Department
     Basic DA : 100% to 50% neutralization of dearness HRA : different for different category of cities Delhi 30% of basic CCA : According to city (A class, B Class, C class Conveyance : Different for different slabs of pay

 Public sector undertakings
       Basic : Rs 4/- per point of price indices DA : According to city (A class, B Class, C class Conveyance : Different for different slabs of pay HRA: 30%, 20 % & 15% of A, B, C category of citied Tiffin Allowance : Rs 30 /- per day Education Allowance : Rs. 125/- per child, subject to maximum of two Electricity Water Allowance; Rs. 150/-

 General
 Annual Bonus or ex-gratia  LTC/ LLTC  Medical – self, wife, children, parents, unmarried sister, widow sister  Leave Encashment         Basic (fixed + variable ) HRA 35 % of basic 45% Education & Hotel Allowance CCA Servant Wages Cost of living Allowance Special pay Annual  Bonus  Executive commission  Medical  LTC

 Private sector

 Note  Statutory Elements:
 PF (12%- 12%)  Pension- as per scheme (legal scheme or developed by company)  Statutory Bonus

VARIABLE PAY SCHEME/ PAYMENT BY RESULT

 Wages for Fair Day‘s work, for More Workwage incentive  Linking pay to performance  Variable pay

 What is performance related pay?
 ―Financially measurable reward to an individual which is linked directly to individual team, or co‘s performance.‖  PRP links pay progression to performance and/or comp rating  Merit Pay individual incentive bonuses individual discretionary bonuses, team / to prefer bonuses, skilled based payment etc.  Merit pay – basic salary increase by ….. Performance alone (i) incremental system (ii) percentage increase  Individual bonuses – Senior executives, sales managers production managers - reward for performance subject to assessment after the event.  Team /group bonus- designed for group performance  CO wide scheme – separate, identifiable reward to all or some, depending on co‘s performance

Types of Variable Pay Plans

Individual •Piece rate •Sales commissions •Bonuses •Special recognitions •(trips, merchandise) •Safety awards •Attendance bonuses

Group/ Team • Gain sharing •Quality improvement •Cost reduction

Organization- wide •Profit sharing •Employee stock options •Executive stock options •Deferred compensation

Factors for successful Variable Pay Plans
Linked to Organizational objectives Results in Desired behaviors Variable Pay Clear Understandable Plan details
Performance Results Linked To payouts

Sufficient Financial Resources Available

Consistent With organization Culture
Clearly Separated From base pay

Clearly communicated

Measurable performance

Current Updated plans

Broad Classification of Fringe Benefits-Different Perspective
 Broad Classification of Fringe Benefits- different
perspective  Legally required – (a) Old-age, disability, health insurance (b) Unemployment compensation, (c) State Sickness benefits  Retirement Benefits
 Pension  Profit Sharing  Stock Bonus

    

Life Insurance Medical Paid rest period Payment for time not worked Miscellaneous + trends

             

Discounts on goods/services Employees‘ Education Employees meals Child care Elder care Early retirement windows – golden offerings Consulting Services EAP Personal Services – Picnic, Club Job related services help employees to prefer their jobs better Subsidized transport Food service Education Family friendly benefits

Some popular forms of nonmonetary rewards
Treats KnickKnacks
•Decorati ve lunche •Co. s •Festiv Watches •Tiepins al bashe •Brooche s s •Coffe •Diaries e •Calenda breaks rs •Picnic • Wallets s • T-Shirts •Dinne r with

Awards

Environm Social ent Acknowledge ment
• Renovatio n • Music • Flexible hours • E-mail • Informal recognition • Recognition at office gettogether • Friendly greetings • Solicitation of advice/suggesti on • Membership of clubs • Company facilities for

Tokens

On-the – job Rewards
• More responsibilit y • Job rotation • Special assignment s • Training • Representin g the company at public fora

•Free

• Trophies • Plaques • Certificates • Scrolls • Letters of appreciation

• Movie tickets • Vacation trips • Coupon s redeem able at stores • Early time-offs •

Executive Compensation

Perquisites

Supplemental Benefits

Long- Term Incentives

Annual Bonuses

Executive Salaries

Common Executive Perks

Transportation • Company car or car allowance •First class air travel •Company airplane usage

Financial/Legal •Financial planning •Tax planning/ tax preparation •No or low interest loans •Legal counseling

Memberships • Country club •Health club •Luncheon club

Arguments in the Executive Pay debate
Criticisms  Boards of Directors give sizable rewards to both high & low performing executives  Executives should not get rewards & bonuses for laying off much of the workforce  Total compensation packages, especially with the ―golden parachutes‖ for failure, are out of line.  Many people contribute to a company‘s success, not just the CEO. Others are paid only a fraction of CEO‘s salaries  Executive compensation frequently is not linked to company performance. Counter- Arguments  The market for executives is tight. Bidding wars & concern over retention drive compensation packages.  Executives are paid for making difficult decisions to benefit companies  Sports & entertainment stars earn as much or more for playing games or acting.  CEOs earn their money with endless hours, great pressures, and skill sets that few others possess.  Measuring executive performance is difficult, and stock prices alone are insufficient.

Latest Indian Scenario
 Average Wage Hike May Be 15.2% In 2008, Real Estate &

  

Infrastructure To Get Highest Pay hike in India moved up from 14.4% in 2006 to 15.1% in 2007. And despite global concerns of an economic slowdown in the US, 2008 is expected to be better with a 15.2% average pay hike in India. For real estate and infrastructure sector, average pay hike was 25.2% in 2007 and expected to remain at a similar level this year. The average salary increase rate in India is expected to slow down to 9-10% by 2012. The top five attrition prone sectors were insurance (35.2%), ITeS (28.9%), hospitality (27.1%), retail (24.7%) and telecom (23.6%). The sectors that recorded the least attrition include automotive, energy, chemicals, electronics and FMCG.

Tax Planning
 The basic purpose of tax planning exercise is to
minimize the incidence of tax to both the employer and the employee.  All constituent parts of employees remuneration are deductible as business expense to the extent possible.  Remuneration received by the employees should qualify for concessional rate of taxation so that their post tax income is maximized.  Tax planning and tax avoidance are two distinct legal concepts.