COMPENSATION MANAGEMENT

Course: HRM
Session #13-14

Dr. S.P. Chauhan

Professor (OB & HR)
INTRODUCTION

Compensation is what employees receive in

exchange for their contribution to the
organization. Compensation is a comprehensive
one including pay, incentives, and benefits
offered by employers for hiring the services of
employees.
COMPONENTS OF REMUNERATION

An average employee in the organised sector is

entitled to several benefits – both financial as
well as non-financial. To be specific, typical
remuneration of an employee comprises:
Wages and salary
Incentives
Fringe benefits,
Perquisites; and
Non-monetary benefits.
COMPONENTS OF REMUNERATION

Wages 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. They differ from employee to
employee and depend upon the nature of job,
type of industry, seniority, and merit.
COMPONENTS OF REMUNERATION

Incentives:
Also called ‘payments by results’, incentives are
paid in addition to wages and salaries.
Incentives depend upon productivity, sales, profit,
or cost reduction efforts. (contd…)
COMPONENTS OF REMUNERATION

There are :
•Individual incentive schemes, and
•Group incentive programmes.
Individual incentives are applicable to specific
employee performance. Where a given task
demands group effort for completion, incentives
are paid to the group as a whole.
COMPONENTS OF REMUNERATION

Fringe benefits:
the term ‘fringe benefits’ refers to the extra
benefits provided to employees in addition to the
normal compensation paid in the form of wage or
salary. (contd….)
COMPONENTS OF REMUNERATION

Fringe benefits: These include such employee

benefits as:
PF
Gratuity
Medical Care
Hospitalization
Accident Relief
Health and group insurance
Canteen, Uniform, recreation and the like
COMPONENTS OF REMUNERATION

Fringe benefits: the main features of fringe benefits are:

They are supplementary forms of compensation.
They are paid to all employees (unlike incentives which
are paid to specific employees whose work is above
standard).
They help raise the living conditions of employees.
They may be statutory or valuntary. PF is a statutory
benefit whereas Transport is a voluntary benefits.
COMPONENTS OF REMUNERATION

Perquisites: These are allowed to executives

and include:
Company car,
club membership,
paid holidays,
furnished house,
stock option shcemes and the like.
(contd..)
16-6

PERKS TO EXECUTIVES INCLUDE -

chauffer who also serves as a bodyguard,

kidnapping and ransom protection, counselling
service, including financial and legal services,
spouse travel, use of company plane, home
entertainment allowance, special living
accommodation away from home, club
memberships, special dining privileges, special
relocation expenses, use of company credit cards,
medical expense reimbursement etc.
Perquisites are offered to retain competent
executives.
Compensation Administration
COMPONENTS OF REMUNERATION

Non-monetary benefits: These include:

challenging job responsibilities,
recognition of merit,
growth prospects,
competent supervision,
comfortable working condition,
flexi time.
 Components of Employee Remuneration
Environment

Remuneration

Financial Non-financial

Job Context
Fringe Benefits Perquisites Challenging job
PF Company car Responsibilities
Hourly and
Incentives Gratuity Club membership Recognition
Monthly rated
Individual plans Medical Care Paid holidays Growth prospects
Wages
Group plans Accident Relief Furnished house Supervision
Salaries
Health and Group Stock option Working
Insurance, etc. Schemes, etc. conditions
Job sharing, etc.

Direct Indirect
Consequences of Pay Dissatisfaction
Performance

Strikes
Desire for More
Pay
Grievances

Absenteeism
Search for Higher
Paying Jobs
Turnover

Pay Lower Attractiveness of

Dissatisfaction Job Job Psychological
Dissatisfaction Withdrawal

Absenteeism Visits to the

Doctor

Poor Mental
Health
Influencing Factors of Remuneration
Nature of Compensation

Compensation offered by an organization

can come both directly through base pay
and variable pay and indirectly through
benefits.
 Nature of Compensation

Base pay: It is the basic compensation

an employee gets, usually as a wage or
salary.
Variable pay: It is the compensation that
is linked directly to performance
accomplishments (bonuses, incentives,
stock options).
Nature of Compensation

Benefits: These are indirect rewards given

to an employee or group of employees as a
part of organizational membership (health
insurance, vacation pay, retirement pension
etc.)
Objectives of Compensation Planning
The most important objective of any pay system is
fairness or equity,. The term equity has three
dimensions:
Internal equity: where more difficult jobs are paid
more
External equity: where jobs are fairly compensated
in comparison to similar jobs in labour market
Individual equity: where equal pay is ensured for
equal work, i.e. each individual’s pay is fair in
comparison to others doing the same/similar jobs.
Objectives of compensation planning

The ultimate goal of compensation administration

(the process of managing a company’s
compensation programme) is to reward desired
behaviours and encourage people to do well in
their jobs. Some of the important objectives that
are sought to be achieved through effective
compensation management are :

Contd..
 Objectives of compensation planning
 Attract talent

 Retain talent

 Ensure equity

 Reward appropriately (loyalty, commitment,

experience, risk taking and other desired

behaviours)

 Control costs

 Comply with legal rules

 Ease of operation
Attract Talent:
Compensation needs to be high enough to
attract talented people. Since many firms
compete to hire the services of competent
people, the salaries offered must be high
enough to motivate them to apply.
Retain Talent:
If compensation levels fall below the
expectations of employees or are not
competitive employees may quit in frustration.
Ensure Equity:
Pay should equal the worth of a job. Similar
jobs should get similar pay. Likewise more
qualified people should get better wages.
New and Desired Behaviour:
Pay should reward loyalty, commitment,
experience, risks taking initiative and other
desired behaviours. Where the company fails to
reward such behaviours, employees may go in
search of greener pastures outside.
Control Costs: The cost of hiring people
should not be too high. Effective compensation
management ensures that workers are neither
overpaid nor underpaid.
Comply with legal rules: compensation
progrmmes must invariably satisfy
governmental rules regarding minimum wages,
bonus, allowances, benefits, etc.
Ease of operations:
The compensation management system should
be easy to understand and operate. Then only
it will promote understanding regarding pay-
related matters between employees, unions,
and managers.
Equity And Pay Rates

Equity in pay rates could be achieved through the

following steps:
 Find the worth of each job through job
evaluation.
 Conduct a salary servey to find what other
employers are paying for comparable jobs.
 Group similar jobs into pay grades.
 Fine tune pay rates.
 Job Evalation

Job analysis is a systematic way of determining the

value/worth of a job in relation to other jobs in an
organization. It tries to make a systematic
comparison between jobs to assess their relative
worth for the purpose of establishing a rational pay
structure. The aim is to determine wage rates for
different jobs.
 Wage and Salary Survey

While job evaluation ensures internal equity, wage

and salary surveys ensure external equity. A wage
and salary survey provides information as to what
other organizations that compete for employees are
paying. The survey could cover all the jobs within
an organization or limited to benchmark jobs, jobs
that are used to anchor the company’s pay scale
and around which other jobs are slotted based on
their relative worth to the firm.
 Wage and Salary Survey

Formal and informal surveys (through

telephone) could be undertaken to collect
data on benefits like insurance, medical
leave, vacation pay, etc.
Published sources also provide valuable
information regarding industrywise trends in
salary structures in and around the country.
The published sources in India include:
(contd….)
 Wage and Salary Survey:
Published Sources in India

Reports published by the Ministry of Labour

Pay commission reports
Reports of wage bonds appointed by government.
Reports of employees and employers’
organizations
Trade journals of specific industry groups etc.
Group Similar Jobs into Pay Grades
In this step, similar jobs (in terms of their
ranking or number points as ascertained by
the job evaluation committee) are grouped
into grades for pay purposes. The organiztion
can now focus on, say 10 to 12 pay grades,
instead of hundreds of pay rates. A pay grade
consists of jobs of approximately equal
difficulty or importance as determined by job
evaluation.
Challenges of Remuneration
Skill-based
Pay
Monetary
vs. Non- Salary
Monetary Reviews
Rewards

Employee
Participation
Remuneration Pay Secrecy

Below Market
Eliticism or
or Above
Egalitarianism
Market Rates
Comparable
Worth
16-9
Challenges of Remuneration

Skill based pay:

in the skill based pay, an employee is

paid on the basis of number of jobs
he or shee is capable of doing, or on
the depth of his or her knowledge.

Compensation Administration
16-9
Challenges of Remuneration

Salary Reviews:
pay, once determined should not remain constant. It
must be reviewed and changed often, but how often
becomes a relevant question. Pay reviews may be
made on predetermined dates, anniversary dates or
there could be flexible reviews.
In the anniversary-date review, salaries may be
reviewed at twelve-month intervals from the date of
the employee’s anniversary date of hire.
In organised industrial establishments, pay review
take place once in three years. Management enter
wage and salary agreements with labour unions and
the agreements will be valid for three years.
Compensation Administration
16-9
Challenges of Remuneration

Pay Secrecy:
The process by which a remuneration plan is
designed and administered is critical for any
organization.One challenge facing HRM concerns the
availability of information about remuneration to
employees. The tendency among most firms is to
maintain pay secrecy as this would help avoid pay
comparisons likely to be made by employees.

Compensation Administration
16-9
Challenges of Remuneration

Eliticism versus Egalitarianism:

Firms become egalitarian when they place most of
their employees under the same remuneration plan.
The plan becomes elitist when the organizations
establish different remuneration schemes. In some
firms only the CEO is eligible for stock options. In
others, even the lowest paid workers are offered
stock options.

Compensation Administration
16-9
Challenges of Remuneration

Comparable worth:
The principle of comparable worth implies
that if both a nurse and an electrician
receive the same number of points under
job evaluation, they need to be paid same
remuneration

Compensation Administration
16-9
Challenges of Remuneration

Monetary versus Non-monetary

Rewards:
The issue relating to monetary and non-
monetary rewards has primarily tax
implications. Many non-monetary rewards
such as medical benefits and housing are
fully or partially exempted from taxes.

Compensation Administration
16-9

Factors affecting compensation

levels
Factors influencing compensation levels
 Job needs
 Ability to pay
 Cost of living
 Prevailing wage rates
 Unions
 Productivity
 State regulation
 Demand and supply of labour

Compensation Administration
16-10

Wage Policy In India

A wage policy offers certain guidelines for

determining a wage structure. The term wage
structure refers to various pay scales showing
ranges of pay within each grade. Three important
elements of wage policy in India are :
 Minimum wage
 Fair wage
 Living wage

Compensation Administration
16-10

Wage Policy In India

Minimum wage:
Wage sufficient to sustain and preserve the
efficiency of the worker and offer basic amenities
of life

Fair wage:
It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as
the productivity of labour, prevailing wage rates, level
of national income and its distribution, the
employer’s capacity to pay etc.
Compensation Administration
16-10

Wage Policy In India

Living wage:
This is the highest amount of wages
proposed by the government, offering
basic amenities of life and satisfying the
social needs of worker.

Compensation Administration
16-11

State regulation of wages

Institutions involved in fixation of wages:

Employer
Collective Bargaining
Legislation
Wage Boards
Pay Commissions

Compensation Administration
 Why Executives to be Paid More?
• they matter much
• they are in short supply
• retaining is difficult
• need to be motivated
• elsewhere they are paid more

Human Resource
45
Management, 5E
16-14

Choices In Designing A
Compensation System
Guidelines for effective performance
based pay stems
To be fair to employees, organisations should keep the
following guidelines in mind while instituting merit-pay
systems
 Establish high standards of performance, so that only
the truly outstanding employees emerge as
winners. (contd…..)

Compensation Administration
16-14

Choices In Designing A
Compensation System
Guidelines for effective performance
based pay stems
 Develop accurate performance appraisal systems.
The focus must be on job-specific, results-oriented
criteria as well as employee behaviours.
 Train supervisions in the mechanics of carrying out
appraisals and offering feedback to employees in a
proper way.
 Tie rewards closely to performance.
 Use a wide range of increases. Also, make pay
increases meaningful.

Compensation Administration
16-16

Broad banding vs. Competency

based pay system

Organisations that follow a skill-based or

Competency Based Pay System frequently use
broad banding to structure their compensation
payments to employees. Broad branding simply
compresses many traditional salary grades (say
15 to 20 grades) into a few wide salary bands
(three or four grades). By having relatively few
job grades, this approach tries to play down the
value of promotions. (contd…)

Compensation Administration
16-20

How to retain talent?

 Improving communication
 Changing work rules
 Increasing pay and incentives
 Ego massaging services
 Non-poaching agreements
 Opportunities to upgrade skills and knowledge
 Offering jobs with stretch, pull and challenge

Compensation Administration