Compensation management

UNDER THE SUPERVISION OF : SUBMITTED BY :

Ms. Malati
Vi!am me"!a

Compensation management
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Employees exchange work for rewards. Probably the most important reward and certainly
the most obvious is money. The goals of compensation administration are to design the
lowest-cost pay structures that will attract, motivate and retain competent employees, and
that also will be perceived as fair by these employees.
OB#ECTIVES OF COMPENS$TION M$N$%EMENT
The basic purpose of wage and salary administration is to establish and maintain an
euitable wage and salary structure. !ts secondary ob"ective is the establishment and
maintenance of an euitable labour-cost structure, i.e., an optimal balancing of conflicting
personnel interests so that the satisfaction of employees and employers is maximi#ed and
conflicts minimi#ed. $ sound compensation administration tries to achieve the following
ob"ectives%
a) For Employees
Employees are paid according to reuirements of their "obs, i.e., highly skilled "obs are
paid more compensation than low skilled "obs. This eliminates ineualities.
The chances of favoritism are greatly reduced.
&ob seuences and lines of promotion are established whenever they are applicable.
Employees' morale and motivation are increased because a wage programme can be
explained and id based upon facts.
b) To Employers
They can systematically plan for and control their labour costs.
!n dealing with a trade union, they can explain the basis of their wage programme
because upon a systematic analysis of "ob and wage facts.
$ wage and salary administration reduces the likelihood of friction and grievances over
wage ineuities.
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!t enhances an employee's morale and motivation because adeuate and fairly
administered wages are basic to his wants and needs.
!t attracts ualified employees b ensuring and adeuate payment for all the "obs.
)asically wage and salary programmes have four ma"or purposes%
To recruit persons for a firm.
To control payroll costs*
To satisfy people, to reduce the incidence of uitting grievances, and fractions over
pay, and
To motivate people to perform better.
F$CTORS $FFECTIN% COMPENS$TION STRUCTURE
The compensation policies different organi#ations vary somewhat. $ sound policy is to
adopt a "ob evaluation programme in order to establish fair differentials in wages based
upon differences in "ob contents. )esides the basic factors provided by a "ob description
and "ob evaluation, those that are usually taken into consideration are%
a) The Organization Ability to pay: +age increases should be given by those organi#ations,
which can afford them. ,ompanies that have good sales and, therefore, high profits tend to
pay higher wages than those which running at a loss or earning low profits because of the
high cost of production or low sales. !n the short run, the economic influence on the ability
to pay is practically -!.. $ll employers, irrespective of their profits or losses, must pay no
less than their competitors and need pay no more if they wish to attract and keep workers.
!n the long run, the ability to pay is very important. /uring the time of prosperity,
employers pay high wages to carry on profitable operations and because of their increased
ability to pay. )ut during a period of depression, wages are cut because funds are not
available. 0arginal firms and non-profit organi#ations 1like hospitals and educational
institutions2 pay relatively low wages because of low or no profits.
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b) Supply and Demand of Labour: The labour market conditions or supply and demand
forces operate at the national, regional and local levels, and determine organi#ational wage
structure and level.
!f the demand for certain skills is high and the supply is low, the result is a rise in the price
to be paid for these skills. +hen prolonged and acute, this labour market pressures
probably force most organi#ations to 4reclassify hard-to-fill "obs at a higher level4 than that
suggested by the "ob evaluation. The other alternative is to pay higher wages if the labour
supply is scarce* and lower wages when it is excessive. 5imilarly, if there is great demand
for labour expertise, wages rise* but if the demand for manpower skill is minimal, the
wages will be relatively low. The supply and demand compensation criterion is very
closely related to the prevailing pay, comparable wage and on-going wage concepts since,
in essence, all of these remuneration standards are determined by immediate market forces
and factors.
c) re!ailing "ar#et $ate: This is also known as the 6comparable wage6 or 6going wage
rate6, and is the widely used criterion. $n organi#ation's compensation policies generally
tend to conform to the wage-rates payable by the industry and the community. This is done
for several reasons. 7irst, competition demands that competitors adhere to the same relative
wage level. 5econd, various government laws and "udicial decisions make the adoption of
uniform wage rates an attractive proposition. Third, trade unions encourage this practice so
that their members can have eual pay, eual work and geographical differences may be
eliminated. 7ourth, functionally related firms in the same industry reuire essentially the
same uality of employees, with the same skills and experience. This result in a
considerable uniformity in wage and salary rates. 7inally, if the same or about the same
general rates of wages are not paid to the employees as are paid by the organi#ation's
competitors. !t will not to be attract and maintain a sufficient uantity and uality of
manpower. 5ome companies pay on the high side of the market in order to obtain goodwill
to insure an adeuate supply of labour, while other organi#ations pay lower wages because
economically they have to, or because by lowering hiring reuirements they can keep "obs
adeuately manned.
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The .iving +age criterion means that wages paid should be adeuate to enable an
employee to maintain himself and his family at a reasonable level of existence. 9owever,
employers do not generally favour using the concept of a living wage as a guide to wage
determination because they prefer to base the wages of an employee on his contribution
rather than on his head. $lso, they feel that the level of living prescribed in a worker6s
budget is open to argument since it is base on sub"ective opinion.
d) Trade %nion&s 'argaining o(er: Trade unions do affect rate of wages. :enerally, the
stronger and more powerful the trade union, the higher the wages.
e) )ob $e*uirements: :enerally, the more difficult a "ob, the higher are the wages,
0easures of "ob difficulty are freuently used when the relative value of one "ob to another
in an organi#ation is to be ascertained. &obs are graded according to the relative skills,
effort, responsibility, and "ob conditions reuired.
f) "anagerial Attitudes: These have a decisive influence on the wage structure and wage
level since "udgement is exercised in many areas of wage and salary administration ---
including whether the firm should pay below average, or above average rates, what "ob
factors should be used to reflect "ob worth, the weight to be given for performance or
length of service, and so forth, both the structure and level of wages are bound to be
affected accordingly. These matters reuire the approval of the top executives. Top
management6s desire to maintain or enhance the company6s prestige has been a ma"or
factor in the wage policy of a number of rims. /esires to improve or maintain morale, to
attract high-caliber employees, to reduce turnover, and to provide a high living standard for
employees as possible also appear to be factors in management6s wage-policy decisions.
g) sychological and social Factors: These determine in a significant measure how hard a
person will work for the compensation received or what pressure he will exert to get his
compensation increased. Psychologically, persons perceive the level of wages as a measure
of success in life* people may feel secure* have an inferiority complex, seem inadeuate or
feel the reverse of all these. They may not take pride in their work, or in the wages they
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get. Therefore, these things should not b overlooked by the management in establishing
wage rates. 5ociologically and ethically, people feel that 4eual work should carry eual
wages,4 that 4wages should be commensurate with their efforts,4 that 4they are not
exploited, and that no distinction is made on the basis of caste, colour, sex or religion.4 To
satisfy the conditions of euity, fairness and "ustice a management should take these factors
into consideration.
h) S#ill Le!els A!ailable in the "ar#et: +ith the rapid growth of industries business trade,
there is shortage of skilled resources. The technological development, automation have
been affecting the skill levels at a faster rates. Thus the wage levels of skilled employees
are constantly changing and an organi#ation has to keep its level upto suit the market
needs.
i) +ost of Li!ing: -ext in importance market is the cost of living. This criterion matters
during periods of rising prices, and is forgotten when prices are stable or falling. The
"ustification for cost of living as a criterion for wage fixation is that the real wages of
workers should not be allowed to be whittled down by price increases. $ rise in the cost of
living is sought to be compensated by payment of dearness allowance, basic pay to remain
undisturbed. 0any companies include an escalatory clause in their wage agreement in
terms of which dearness allowance increases or decreases depending upon the movement
of consumer price index 1,P!2.
,) Labour La(s: +e have a plethora of labour laws at the central as well as the state levels.
5ome of the central laws which have a bearing on employee remuneration are the Payment
of +ages $ct, 1<3=* the 0inimum +ages $ct, 1<8>. The payment of )onus $ct, 1<=;*
Eual remuneration $ct, 1<?=* and the Payment of :ratuity $ct, 1<?(.
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E&ECUTIVE COMPENS$TION
The pay of executives is merely a special case within the topic of compensation, but it does
have several twists that deserve attention. 7irst, the base salaries of executives are higher
than those of low-level-managers or operative personnel. 5econd, executives freuently
operate under bonus and stock option plans that can dramatically increase their total
compensation. $ senior executive at :eneral motors, !)0, /ata :eneral, or :eneral
Electric may in good year earn @;AAAAA or @1AAAAAA or more on top of his base salary.
Executives receive peruisites or special benefits that others do not.
9ow do organi#ations "ustify such extraordinary salaries for their executivesB The answer
is simple% economics and motivation. !n economic terms, we know that top managers are
expected to demonstrate good decision making abilities. This skill is not widely held in our
society. $s a result, the supply of ualified senior executives is scarce, and organi#ations
have bid up the price for this talent. 9igh salaries also act to motivate both top level-
managers to perform well in order to keep their "obs.
COMPONENTS OF E&ECUTIVE COMPENS$TION
a) 'ase salaries: )ase salaries for ,ECs are typically determined through competitive
Dbenchmarking,E based primarily on general industry salary surveys and supplemented by
detailed analyses of selected industry or market peers.
b) Annual 'onus lans: Firtually every for-profit company offers an annual bonus plan
covering its top executives and paid annually based on a single-year's performance. The
bonus is mostly computed using a formula, usually taking into account increases in sales
and profits. This bonus although earned in the current period, is distributed over several
years.
c) Stoc# options: 5tock options have been common incentive offered to executives. They
generally allow executives to purchase, at some time in the future, a specific amount of the
company's stock at a fixed price. Gnder the assumption that good management will
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increase the company's profitability and, therefore, the price of the stock, stock options are
viewed as performance based incentives.
d) er*uisites: Executives are freuently offered a smorgasbord of peruisites not offered
to other employees. The logic of there perks is to attract and keep good managers and to
motivate them to work hard in the organi#ation's interests.
e) -olden arachute: $ popular benefit that accrued to top executives in the early >As was
the Dgolden parachuteE. !t was designed by top executives as a means of protecting
themselves if a merger took place. These parachutes provide either a severance salary to
the departing executive or a guaranteed position in the newly created 1merged2
organi#ation.
ME$NIN% OF FRIN%E BENEFITS:
7ringe benefits may be defined as wide range of benefits and services that employees
receive as an integral part of their total compensation package. They are based on critical
"ob factors and performance. 7ringe benefits constitute indirect compensation as they are
usually extended as a condition of employment and not directly related to performance of
concerned employee. 7ringe benefits are supplements to regular wages received by the
workers at a cost of employers. They include benefits such as paid vacation, pension,
health and insurance plans, etc. 5uch benefits are computable in terms of money and the
amount of benefit is generally not predetermined.
The purpose of fringe benefits is to retain efficient and capable people in the organisation
over a long period. They foster loyalty and acts as a security base for the employees.
FE$TURES OF FRIN%E BENEFITS:
Different from regular (ages: 7ringe benefits are different from regular wages as
such benefits are those payments, which an employee en"oys in addition to wages
he receives. !t is a supplementary payment and provides support to an employee.
Employee moti!ation% 7ringe benefits are not given to employees for performing
certain "obs. The purpose is to encourage them to take more interest in the assigned
work.
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%seful but a!oidable e.penditure: 7ringe benefits constitute a labour cost for the
employer.
/ot directly lin#ed (ith efforts: 7ringe benefits are not direct reward for the efforts
made or the production given by an employee.
'eneficial to all employees: 7ringe benefits are a labour cost but its benefits should
be made available to the entire labour force and not to a small group of employees.
OB#ECTIVES OF FRIN%E BENEFITS:
To supplement direct remuneration% 7ringe benefits supplement regular pay of
employed. !t raises the total earnings of an employee and provides better life and
welfare to him.
Emplo'e!s p!e(e! (!inge )ene(its: employers prefer this indirect remuneration to
direct pay increase.
To !etain *ompetent emplo'ees: 7ringe benefits create satisfied labour force. !n
addition, the management can attract and retain competent personnel in the
organisation by offering liberal packet of fringe benefits.
To develop good corporate image% 7ringe benefits help to develop a good corporate
image.
To !aise emplo'ee mo!ale: .iberal package of 7ringe raises the morale of employees.
+IMIT$TIONS OF FRIN%E BENEFITS:
There are some limitations of 7ringe )enefits. These are%
7ringe )enefits may lead to unhealthy competition among employees
The expected benefit may not be available if the monetary benefits are not adeuately attractive
to employees.
The motivation may not be as per expectation if the implementation of the benefits scheme is
not transparent.
$DV$NT$%ES OF FRIN%E BENEFITS
There are certain advantages of 7ringe benefits. These are%
7ringe benefits provide support to remuneration paid to employees.
7ringe benefits improve efficiency and productivity of employees.
7ringe benefits act as an added attraction to the employees.
7ringe benefits reduce monotony and fatigue of employees. They make employees
efficient and co-operative for whatever organisational changes reuired to be
introduced.
7ringe benefits raise morale of the employees. They develop affinity for the
organisation.
7ringe benefits develop good corporate image and raise market standing of the
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organisation.
7ringe benefits act as a motivating force. They motivate employees and induce
them to work for the progress and prosperity of the organisation.
TYPES OF FRINGES/ FRINGE BENEFITS:
!" Pa#ment $or time not %or&ed '# t(e emplo#ee:
9olidays.
Facations.
.eave with pay and allowances.
)" *ontingent and de$erred 'ene$its:
Pension payment.
:roup life insurance benefit.
:roup health insurance.
5ick leave, maternity leave, child care leave, etc.
5uggestionHservice award
5everance pay.
+" ,egall# re-uired pa#ments:
Cld age, disability and health insurance
Gnemployment compensation
+orker6s compensation.
." /isc0 'ene$its:
Travel allowances.
,ompany car and membership of clubs, etc
0oving expenses.
,hild care facilities.
Tool expenses and meal allowances, etc
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#OB EV$+U$TION
1EFINITION:
$ccording to Edwin b. 7lippo, D&ob evaluation is a systematic and orderly process of
determining the worth of "ob in relation to other "obsE.
&ob evaluation means determining the relative worth of a "ob in an organi#ation by
comparing it with other "obs within an organi#ation and with "ob market outside "obs are
evaluated on the basis of their content and are placed in the order of their importance. !n
this way, "ob evaluation helps in establishing "ob hierarchy. !t is a process by which "obs in
an organi#ation are appraised. !t suggests comparative importance of different "obs. $ wage
structure hierarchy is based on such "ob evaluation.
!n "ob evaluation the "obs are ranked on the basis of their relative importance and not the
"ob holders. They are rated through performance appraisal. &ob evaluation is the output
provided through "ob analysis.
Features:
1. !t determines the relative worth of "obs in an organi#ation. &obs are evaluated as per their
content and place in the order of their importance.
(. !t is based on the analysis of the facts about the "ob collected through "ob analysis.
3. !t helps to bring a balanced wage structure in an organi#ation. This is possible as "ob
hierarchy is established. The purpose is fixation of satisfactory wage differentials among
various "obs.
O'2ectives:
1. To establish by impartial "udgement the logical and accurate relationship of each
"ob to other "obs within the firm.
(. To establish satisfactory wage and salary differentials.
3. To select employees more accurately and train, promote or transfer them within the
firm ob"ectively and impartially.
8. To provide them information for work organi#ation, employees selection,
placement and other similar problems.
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;. To promote employee goodwill, strengthen and maintain morale and loyalty and
provide an incentive for efficiency.
=. To determine the rate of pay for each "ob that is fair and euitable in relation to
other "obs in the plant.
3dvantages / Importance%
1. &ob evaluation clearly indicates the relative worth of different "obs in the
organi#ation.
(. !t establishes a hierarchy of "obs and evolves a graduated wage scale for employees.
3. !t is useful for introducing a satisfactory, rational and balanced wage structure in an
organi#ation. !t is also useful for simplifying wage administration.
8. !t promotes employees goodwill, strengthens and maintains high morale and loyalty
of workers and also provides incentives for raising efficiency.
;. !t provides a scientific base for promotions and transfers of workers in an
organi#ation.
=. !t avoids in"ustice to workers as regards wage payment, promotions and transfers.
?. !t simplifies wage administration and facilitates merit rating and training
programmes for employees.
>. !t removes grievances and disputes among employees over relative wages and
makes the wage system acceptable to all employees.
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REFERENCES :
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