Wage and Salary Administration (Compensation Management)

UNIT V

Introduction
Employee compensation is a vital part of human resource management. Wages, salaries and other forms of employee compensation constitute a very large component of operating costs. Human resources are unique and precious for any organization. Survival and growth of an organization is critically linked to the performance and commitment of its workforce.

Objectives of Compensation Management

To establish a Fair and Equitable Remuneration : There should be internal and external equity in remuneration paid to employees. To attract competent personnel : Attract qualified and hard working people by ensuring an adequate payment for all the jobs. To retain the present employees: By paying at competitive levels, the company can retain its personnel.

Objectives contd..
To improve productivity : Its improves the motivation and morale of employees. To control costs: Through sound wage and salary administration labor and administrative costs can be kept in line with the ability of the company to pay. To improve union management relations : Reduces grievances arising out of employment. To improve public image of the company

What Determines How Much You Pay?

Prevailing Wages Ability to Pay Cost of Living Productivity Demand for and Supply of Labor Job Requirements Government Laws

Principles of Compensation Management

Keep in view the interest of the employer and the employees. State clearly in writing to ensure uniform and consistent application. Should be sufficiently flexible or responsive to changes. Employees should know and understand the wage policy. Should be reviewed and revised periodically.

 Pay is a statement of an employees worth by an employer. Pay is a perception of worth by an employee. Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment. It consists of 2 parts
 Direct financial payments  Indirect payments

The Bases for Compensation

Time-based and Performance-based
Hourly Work Work paid on an hourly basis. Salary Workers Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods. Piecework Work paid according to the number of units produced. Sales Commissions

Total Compensation Direct

Wages / Salaries Commissions

Indirect
Time Not Worked Vacations Breaks Holidays Insurance Plans Medical Dental Life Security Plans Pensions Employee Services Educational assistance Recreational programs

Bonuses

Gain sharing

Wage Concept
Monetary compensation package of employees generally consists of the following components: 1. Basic Pay 2. Allowances 3. Incentives 4. Fringe Benefits/ Prequisities

Basic Pay
Generally determined through job evaluation. Depends on various factors like demand for and supply of labor, prevailing wage rates, ability to pay of employer.

Allowances
1. Dearness allowance: Allowance paid to enable them to
face the increasing dearness of essential commodities. Paid to neutralize the effects of inflation.

2. House Rent Allowance: Employers who do not provide

living accommodation pay HRA to employees.

3. City Compensatory Allowance: This allowance is

generally paid to employees in metros or big cities where cost of lining is comparatively high. Fixed amount per month.

4. Transport Allowance. Fixed amount per month

 Incentives: Performance linked remuneration. Bonus, Profit sharing, commission on sales. Fringe Benefits: PF, Gratuity, encashment of earned leave, company house, company car, LTC, medical aid, interest free loan, holiday homes, stock options.

Minimum Wage- Supreme Courts Direction

To provide for sustenance maintenance of the worker and his family. An employer who can not pay minimum wages has no right to exist. Payment of less than min. wage amounts to forced labour. Capacity to pay is relevant for determination of fair wages, over and above minimum wages. M.W. should also have some provision for childrens education, medical requirements, minimum recreation, provision for old age, marriages etc.

Fair Wage
The concept was deliberated upon by the Committee on Fair wages in 1948 The lower limit of fair wage is minimum wage and the upper limit is the capacity to pay. Between the two, the actual wage will depend upon the following factors: (i) Productivity of labour (ii) Prevailing rates of wages in the same or similar occupations in the same or neighbouring localities (iii) Place of industry in the economy (iv) National income and its distribution

Living Wage
It represents a standard of living which provides not only for bare sustenance, but: 1. A decent standard of life consistent with human dignity ( nutritious food, clean water, shelter, clothes, education, transport, etc.) 2. A measure of frugal comforts, amenities and a degree of leisure 3. Protection against ill health (health care) 4. Requirements of essential social needs 5. Some insurance against the more important misfortunes, and risks physical and financial, including old age ( social protection). Its a dynamic concept which aims at steadily improving living standards of working classes ( art 43 of the Constitution) Employers have a moral imperative to pay a living wage to workers

Components of Min. Wage-Dr. Aykroyds Formula

The standard working class family should be taken to consist of three consumption units for one earner, earnings of women, children and adoloscents should be disregarded. Minimum food requirements should be calculated on the basis of a net intake of 2700 calories for an average adult of moderate activity

Components of Min. Wage (contd)

Clothing @ 18 yards/ anum.4= 72 yards Housing- minimum rent charged by the govt. in any area for the houses provided under the subsidised industrial housing for low income groups. Fuel, lighting and other miscellaneous items of expenditure should constitute 20% of total minimum wage

The Compensation Structure

Step 1. The salary survey
A survey of the wages paid to employees of other employers in the surveying organizations relevant labor market. Helps maintain internal and external pay equity for employees. Aimed at determining prevailing wage rates. A good salary survey provides specific wage rates for specific jobs. Labor Market The area from which employers obtain certain types of workers.

Collecting Survey Data

Outside Sources of Data
Bureau of Labor Statistics (BLS)
National Compensation Survey

State and local wage surveys Online survey data

Collecting Survey Data

Conducting Employer-initiated Surveys Select key jobs. Determine relevant labor market. Select organizations. Decide on information to collect: wages/ benefits/ pay policies. Compile data received. Determine wage structure and benefits to pay.

The Compensation Structure (contd)

Step 2. Job evaluation
A systematic comparison done in order to determine the worth of one job relative to another. Basic principle : Jobs that require greater qualifications, more responsibilities, and more complex job duties should be paid more highly than jobs with lesser requirements.

The Compensation Structure (contd)

Step 3. Group Similar Jobs into Pay Grades A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation. Point method: the pay grade consists of jobs falling within a range of points. Ranking method: the grade consists of all jobs that fall within two or three ranks. Classification method: automatically categorizes jobs into classes or grades.

The Compensation Structure (contd)

Step 4. Price Each Pay Grade Wage Curve Shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

Plotting a Wage Curve

The Compensation Structure (contd)

Step 5. Fine-tune pay rates
It involves developing pay ranges and correcting out of line rates. Developing pay ranges Flexibility in meeting external job market rates Easier for employees to move into higher pay grades Allows for rewarding performance differences and seniority Correcting out-of-line rates Raising underpaid jobs to the minimum of the rate range for their pay grade. Freezing rates or cutting pay rates for overpaid (red circle) jobs to maximum in the pay range for their pay grade.

Wage Structure

Note: This shows overlapping

wage classes and maximum minimum wage ranges.

Legal framework of Wage

P.W. Act 1936 M.W. Act 1948 Equal Remuneration Act 1976 Payment of Bonus act 1965 Provident Fund Act 1952 Payment of Gratuity Act, 1972 Employees State Insurance Act 1948 Maternity Benefit Act, 1961 Workmens Compensation Act, 1923

INCENTIVES
Hard work pays is the simple philosophy behind wage incentive programmes. Wage incentives are any form of performance-based financial and/or nonfinancial rewards payable to attract and retain the best talents without any permanent financial commitment for the organization.

Objectives of wage incentives

To attract and retain efficient employees and induce them to work harder in the job. Enhancing employee motivation. Increasing productivity and performance. Leads to employee satisfaction. Reducing the time and cost of supervision.

Types of incentive schemes

Micro level plans: 1. Individual based plans 2. Team based plans Macro level Plans 3. Business unit or plant level plans 4. Entire organization level plans

INDIVIDUAL BASED PLANS

Merit pay: An increase in base pay, normally given once in a year. Once given, it becomes part of the base salary In this method, the organization links a part of the employees wages to their actual performance in comparison with the standards set by it. These standards may be in terms of critical job factors like competency, initiative, attitude, safety records, punctuality etc.

 Lump sum payments- individual bonus programmes: Given on a one time basis, like, a paid vacation, a complimentary dinner, reward to employees of an airline for on time operation. Piece work: Incentive based on each unit produced: 1. Straight Piece Work (wage earnings = number of units produced * the piece rate per unit)

2. Piecework with Guaranteed Time Rate: Guaranteed time rate( such as minimum wage), regardless of units produced. 3. Differential piece rate: Reward on the basis of a percent premium over the percentage by which the performance is above the standard.

TEAM BASED PLANS

Reward to team members, equally, based on group outcomes Some organizations allow teams to decide how its bonus will be distributed within the group.

PLANT WIDE INCENTIVES

Rewards all workers in a plant or business unit based on the performance of the entire plant/ business unit. Profits and stock prices are organization level plans, and not plant level plans. Key performance indicator for plant level performance is plant or business unit efficiency- normally measured in terms of labour or material cost savings, compared to an earlier period.

 Management and employee/ union teams normally generate or evaluate cost-saving ideas. Such plans are usually called gain sharing. Is a plant wide pay for performance plan in which a portion of cost-savings is returned to employees as lump sum bonus Appropriate for the manufacturing sector and also service sector, like hospitals.

CORPORATE WIDE PLANS

Rewards on the basis of the entire organizations performance, like allocation of a portion of the declared profits to employees on an annual or quarterly basis, according to a formula, eg. Bonus. This is known as Profit sharing

 Companies usually create a profit sharing pool, distributed via a plan, eg. A retirement plan, ESOPs- offered as outright grant or at a favourable price. The right to purchase, at some time in the future, a given no of shares of a company on todays price. The options provide an incentive to go for spectacular results, without risking their own money. They are golden hand cuffs.

FRINGE BENEFITS

Features of Fringe Benefits

An employee enjoys them in addition to the salary he/she receives. They are not given for specific jobs performed but to make jobs more attractive. They are not linked to productivity so do not reward performance in any way, criteria used is other than performance. They have an indirect impact on workers efficiency. If impact is direct, it is not a fringe benefit.

Types of Fringe Benefits

Pay for time not worked Employee security Safety and health Welfare and recreation Old age and retirement

Flexible Benefits Plans (Cafeteria Plans) & Golden Parachute

Benefit plans that enable individual employees to choose the benefits that are best suited to their particular needs

Flexible Benefit (Cafeteria) Plans

Advantages
more appreciation of benefits offered better match between benefits and employee preference

Disadvantages
increased design and administrative costs

Thank You