Compensation

Management
ASHISH GOEL 14020241019
BHAWANA SHARMA 14020241020
PRAKSHI GUPTA 14020241021
RAMNEEK SAHIM 14020241023
SETHUNATH S. 14020241024
ARUN V MENON 14020241042



Compensation is the remuneration an employee receives for his or her contribution to
the organisation.

Employee compensation is a better term than employee benefits or wages or salaries.
What the employee provides the employer is a labour service, usually known as work

Compensation Management is more than just the means to attract and retain talented
employees. In todays competitive labour market, organizations need to fully leverage
their human capital to sustain a competitive position. This requires integrating
employee processes, information and programs with organizational processes and
strategies to achieve optimal organizational results.

Remuneration is another term synonymously used with compensation.


What is Compensation



Organisation should have a compensation philosophy of its own that guides
administration of monetary and non-monetary benefits.


Refers to a set of beliefs and guiding principles and which are consistent with the
objectives of the organisation


The compensation philosophy needs to achieve equity, transparency , and
consistency in payment of compensation to the employees.




Compensation Philosophy
DIRECT
INDIRECT
FINANCIAL
NON -FINANCIAL
Direct
compensation
1.Basic salary
2.Bonus
5.Leave travel
allowance
6.Special
allowance
3.Medical re-
Imbursement
4.House rent
allowance


1. Wage and Salary
Wages represent hourly rates of pay , and salary refers to the monthly rate of pay
irrespective of the number of hours put in by an employee. Wages and salaries are
subject to annual increments .

2. Incentives
Also called payment by results incentives are paid in addition to wages and
salaries. Incentives depend upon productivity, sales, profit or cost reduction efforts.

There are A) Individual Incentive Schemes
B) Group Incentive programme




Allowances :

Apart from dearness allowance, other allowances such as House Rent Allowance (HRA) ,
Conveyance Allowance and Leave Travel Allowance (LTA) are also part of compensation.

House Rent Allowance :

Leave Travel Allowance:

Conveyance Allowance :


Indirect compensation
1.Overtime policy
2.Retirement Benefits
3.Hospitalization
4.Insurance
5.Holiday Homes
6.Flexible timing
Non-Monetary
It includes-
Restaurant coupons
Relocation costs
Movie tickets
Recognition of birthdays
Free lunches, snacks, or beverages
Coveted parking spaces
Outstanding employee plaques
Employee discounts

Apart from all many skilled laborers will not agree to work if they do
not have at least a simple benefits package available to them. It is
standard in U.S. culture to offer a basic amount of non-monetary
benefits to full-time, permanent employees

Theories of Compensation
Reinforcement Theory:

A behavior that has a rewarding experience is likely to be repeated .



Expectancy Theory:
This concentrates how motivation is depended upon Expectancy,Performance,Valence.



Equity Theory
Equity is balance between the inputs an individual brings to a job & the outcomes he or she
receives from it.
Employees inputs includes experience, education, special skills, efforts and time worked.
Outcomes includes pay, benefits, achievement, recognitions, and any other rewards.
Inputs and outcomes are in different units, and are hard to compare to each other directly.
Equity theory suggest that individuals determine whether they are being fairly treated by
comparing their own inputs/outcomes ratio to the input/outcome ratio of others
Types of Equity
Three element of equity can be distinguished as external, internal and individual.

External equity refers to comparison of similar jobs in different organizations.
Internal equity refers to the relationship among the jobs within a single organization.
Individual equity refers to comparison among the individual in the same job with the same
organization

Consequences
Person Comparison Others
My Rewards(outcomes) Others Rewards Equity
My Contributions(inputs) Others Contribution

My Rewards(outcomes) Others Rewards Inequity
My Contributions(inputs) Others Contribution (under reward)

Action to restore equity from Inequity
Person could ask for a raise in salary.
Person could reduce contributions (work less hard)
Person could try to get others to increase contribution(work harder)
Last resorts : quit or choose another comparison other.



Agency Theory
Employers assumes the role of principals and employees that of agents.

Primary objective is choose a contract that aligns agents interest with that of principals.

Types of contracts:
Behavior oriented
Outcome oriented
Importance of ideal Compensation System

An ideal compensation system will have positive impact on the efficiency and
results produced by employees. It will encourage the employees to perform
better and achieve the standards fixed.

It will enhance the process of job evaluation. It will also help in setting up an
ideal job evaluation and the set standards would be more realistic and
achievable.

It aims at creating a healthy competition among them and encourages
employees to work hard and efficiently.


Importance of ideal Compensation System
Sound Compensation/Reward System brings peace in the
relationship of employer and employees.

It promotes employees to set higher goals of performance.

The perfect compensation system provides platform for happy and
satisfied workforce. This minimizes the labour turnover. The
organization enjoys the stability.

The organization is able to retain the best talent by providing them
adequate compensation thereby stopping them from switching over
to another job.


FACTORS INFLUENCING EMPLOYEE COMPENSATION
LABOUR MARKETS
The labor market reflects the forces of supply and demand for qualified labor
within an area. These forces help to influence the wage rates required to recruit
or retain competent employees. It must be recognized, however, that counter-
forces can reduce the full impact of supply and demand on the labor market.
Going rate : These are wages that is paid by different units of an industry in a
locality and by comparable units of the same industry located elsewhere.




Productivity influences wage fixation as the effort or productivity increases
incentive also increases.
LABOUR UNIONS AND COLLECTIVE BARGAIN
Labor union is to bargain collectively over conditions of employment. The unions goal in
each new agreement is to achieve increases in real wages. wage increase larger than the
increase in the CPI, thereby improving the purchasing power and standard of living of its
members.
Union pressure frequently forces management to increase efficiency and thus the
organization's ability to pay. Where this "shock effect" cannot occur because of
unchangeable economic conditions or company conditions
Unionism has a moderate effect, on the order of 12-25 percent.
Induces spillover effect (i.e. The effect of unions on nonunion wages) ensuring
"standard rate"
When General Electric's President wrote a letter to all 20,000 GE subcontractors in
December of 1999 and suggested, recommended, and warned them that they should
consider moving their plants to Mexico (and its non-union environment), it does not
take any genius to forecast the role of manufacturing unions in the future.

LABOUR LAWS
Payment of Wages Act,1936 : Regulates the payment of wages and also protects against
irregularities and unauthorized deductions. Act ensures payment of wages at regular
interval.
The minimum wages act,1948 : Enables central and state governments to fix minimum
wages payable to certain class of employees.




The payment bonus Act,1965: Ensures payment of specified rate of bonus in certain
establishments.
Equal Remuneration Act, 1976 : Ensures equal remuneration to men and women.
The payment Gratuity Act, 1972 : Ensures Gratuity to employees after superannuation.
Cost of Living
Because of inflation, compensation rates have had to be adjusted upward periodically
to help employees maintain their purchasing power. This can be achieved through
escalator clauses found in various labor agreements. These clauses provide for
quarterly cost-of-living adjustments (COLA) in wages based on changes in the
consumer price index (CPI).
Society
Remuneration paid to employees has social implications. The
supreme court has been keeping social and ethical consideration in
adjudicating wage and salary disputes.
Economy of Country
The economy of the country has huge effect on the
remuneration decisions and can alter the
compensation decisions.
Internal
Factors
Employers Ability to Pay
Worth of a Job
(Job evaluation)

Employers Compensation
Policy
Employees Relative Worth
CONCEPT OF DIFFERENT WAGES
Minimum wage
Fair wage
Living wage
WAGES: An economic compensation met by the employer
under some contract to his employees for services rendered
by them.
MINIMUM WAGES
Minimum wages (Revision every 5 years):
3 consumption units for 1 earner
Minimum food requirements of 2700 calories per average Indian
adult
Clothing requirement of 72 yards per annum per family
Rent corresponding to minimum area provided for under
Governments Industrial Housing Scheme
Fuel, lighting, etc expenditures that constitute to 20% of the total
minimum wages
Children education, medical requirement, minimum recreation,
etc that constitutes to 25% of the total minimum wage
Local conditions and other factors affecting wages


Living Wage
More than the minimum wage
Considers national income
Paying capacity of industrial sector

Fair wage
Above minimum wage (lower-limit) and
below living wage (upper-limit)
Factors: labour productivity prevailing wage
rate, level of national income and its
distribution and capacity of industry to pay

LIVING AND FAIR WAGE
Wage Incentive Plans
A system which provides additional pay (or bonus) for
qualitative and quantitative performance which
exceeds standard or normal levels



Relationsh
-ip
building
Increasing
productivity
Employee
morale
Employee
motivation
Employee
regularity
Cost
control
Improve
ment in
quality
of life
BASIC WAGE PLANS
Time-Rate
System
Piece-Rate
System Most common
method
Time-based
wages
Mostly for
general roles
(administration,
maintenance,
etc)
Tendency to
creep upwards
(inflation,
promotion, etc)
Easier from an
employees
perspective
Payment by
results system
Output-related
payment
Encourages effort
at the cost of
quality
Home-based
workers, sub-
contractors
Working hours
are
unaccountable
Earnings mostly
below average
TOTAL
WAGE =
TIME
TAKEN *
RATE
TOTAL
WAGE =
UNIT
PRODUCED
* RATE PER
UNIT
Skill Based Pay : Employees are compensated for
their job-related skills. Freshers are recruited at below
market rate and as they gain expertise their
compensation increases.
Competence based Pay : Competency can be
defined as the knowledge, skills and behaviour of an
individual that contribute to workers performance.
Broadbanding : As a base-pay technique, reduces
the number of salary levels into broad salary bands.
The bands have fixed minimum and maximum which
overlap with other bands. Rs.10,000 Rs.18,000
Rs.12,000 Rs.20,000

WAGE THEORIES
SUBSISTENCE
THEORY
WAGE FUND
THEORY
MARGINAL
PRODUCTIVITY
THEORY
EMPLOYMENT
THEORY
EXPLOITATION
THEORY
COMPETITIVE
THEORY
LABOUR
THEORY OF
VALUE
Job
Description
Job
Evaluation
Job
Hierarchy
Pay Survey Pricing Jobs
PLANNING
Remuneration Model
Job Description
Experience
Education
Responsibility
Complicity of Duties
Supervision received
Supervision
exercised
Consequence of
error
Working condition
Mental, physical and
visual demands
Confidential data
Gaining Acceptance
Creating Job evaluation committee
Finding jobs to be evaluated
Analyzing & Preparing job description
Selecting the method of evaluation
Classifying jobs
Installing the programs
Reviewing periodically
Job Evaluation
Pay Systems
Pay Fixation
Job Hierarchy
Points Assigned to
compensable factors.
Aggregate decides Job
worth.
Pay Survey

Pay differentials.
Pricing
Jobs
Pricing jobs
Job worth (internal)
Labour-market worth
Establishing appropriate pay
level
Grouping different pay levels
into pay grades
W
a
g
e
s

o
r

s
a
l
a
r
i
e
s

Point Values
Scattergram graph combining
survey wage rates and points
assigned

Each point represents
1) Point worth
2) Market determined
wage rate.
Pay levels
Pay grades
Utilizes same least squares method of regression in concept.

Creates Job classes

All jobs of same class receives the same salary.

Broadbanding has come into picture.
Salary band
Defines the extremes minimum and
maximum salaries

Helps the org to ensure internal
compensation.

Base for job offering discriptions.

Level Position Median Salary
L0 Traniee 1,40,000
L1(A) Soft. Engg. 2,80,000 3,68,782
L1(B) Sr. Soft. Engg. 3,30,000 5,45,598
L2 Principal Engg. 5,50,000 5,89,910
L3(A) Team Lead 7,20,000
L3(B) Project Lead 8,10,000
L4(A) Associate Manager 9,90,000
L4(B) Manager 18,25,000
L4( C) Sr. Manager 23,50,000
A TYPICAL SALARY BAND.
Challenges to Compensation Management
Skill-based pay
Pay Reviews
Pay Secrecy
Comparable worth
Employee participation
Eliticism Vs. Egalitarianism
Monetary Vs Non-Monetary Rewards

Skill Based Pay
Opposite to the traditional model of Job-based pay.

Workers paid on the basis of number of jobs they are
capable of doing.

Depends on the depth of the knowledge.

Prime motive is to motivate the employee which in-turn
results in contributing to the effectiveness of the
organization.

More flexibility ,reduced workforce and cost controls.


Pay Reviews
Periodic reviews for pay.

Negotiations happen at the time of pay review.

Based on performance .

In Govt. organizations, happens on the
recommendations of Pay Commission.


Pay Secrecy
Secrecy is maintained to avoid comparisons made by employees.

Public organization and Organized sectors disclose the wages and
grades of pay.

Family controlled organization or private enterprises maintain a pay
secrecy.


Comparable worth
Equal pay for equal work(Equal remuneration Act, 1976).

Workers in the same field, to be paid same if their merit and seniority
match.

Any bias would render the worth of it.


Employee Participation
Remuneration plan, where they exhibit a little resistance in
accepting it.

So management comes into rule in that scenario.

Prime motive is to involve employees in different phases of
rewards system( Job evaluation etc), except the
remuneration plan where the management comes into role

Possibility only in the cases, where a firm has already laid
down some basic principles of participative management.
Eliticism Vs. Egalitarianism
Egalitarianism
When most employees get same
remuneration, the Egalitarianism
system prevails.

Reduces work barriers between
employees.

More prevalent in highly competitive
environments, involving risks and
company expansion.
Eliticism
Establishing different remuneration
schemes.

Prevalent among older ,well-
established firms, stable market
condition and limited competition.

Results in more stable workforce.

Employees make money by moving
up through the company.


Monetary Vs Non-Monetary Rewards
Monetary in form of Variable pay, performance linked incentives.

Non-Monetary in form of medical benefits, insurance plans etc (Tax
exempted)

Most preferred are the non-monetary from the perspective of both
employee and employer.