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9.1 Compensation Management Final

The document outlines the various components and objectives of compensation management, including direct cash payments, benefits, and incentives aimed at motivating employees. It details key terminologies such as basic pay, allowances, and different types of compensation like wages, salaries, and perquisites, as well as theories and methods of wage payment. Additionally, it discusses the importance of job evaluation, pay surveys, and the factors influencing compensation plans both externally and internally.

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Aazam Shakeel
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18 views40 pages

9.1 Compensation Management Final

The document outlines the various components and objectives of compensation management, including direct cash payments, benefits, and incentives aimed at motivating employees. It details key terminologies such as basic pay, allowances, and different types of compensation like wages, salaries, and perquisites, as well as theories and methods of wage payment. Additionally, it discusses the importance of job evaluation, pay surveys, and the factors influencing compensation plans both externally and internally.

Uploaded by

Aazam Shakeel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Compensation Management

Compensation
• Compensation includes direct cash
payments, indirect payments in the form of
employee benefits and incentives to
motivate employees to strive for higher
levels of productivity.
TERMINOLOGY
• BASIC PAY- a standard rate of pay
before additional payments such as
allowances and bonuses

• DA (Dearness Allowance)- cost of living


adjustment allowance paid to
Government employees, Public sector
employees (PSU) and pensioners
• HRA (House Rent Allowance)- given by
the employer to the employee to meet the
expenses in connection with rent of the
accommodation which the employee might
have to take for his residential purpose
PF (Provident Fund)

• It is a kind of investment or saving


scheme, composed of contributions made
by the employee during the time he/she
worked along with an equal contribution by
his employer.

• Rate= 12 % of the Basic salary contributed


each by the employer and the employee
GRATUITY:
 It is a lumpsum payment made to
the employee on retirement who
has given a continuous service of 5
years atleast.
Calculated as follows:
Last month salary*15/26*completed
years of service
OR
Rs. 10 lacs
(whichever is lower)
Various components of
Compensation
• Wage and Salary
• Incentives
• Fringe Benefits
• Perquisites
Wage and Salary
• Wage—
Wage is referred to as Remuneration to
workers particularly. (hourly, daily, weekly)
• Salary—
Salary refers to as remuneration paid to
white-collar employees including
managerial personnel.
(Normally based on fix period of time then
productivity)
Incentives
• Incentives are the additional payment to
employees besides the payment of wages
and salaries.
• Often these are linked with productivity.
• May be given on individual basis or group
basis.
Fringe benefits
• Long term benefits like provident fund,
gratuity, pension.
• Medical benefits, accident relief, health
and life insurance.
• Facilitation in performance of job like
uniforms, canteens, recreation, etc.
Perquisites
• Normally provided to managerial
personnel.
• Either to facilitate job performance or to
retain people in organization.
• It includes- Company car, club
membership, free residential
accommodation, paid holiday trips, stock
options etc.
Objectives of Compensation
Management
• To acquire qualified and competent
personnel.
• Retaining present personnel.
• Motivating personnel.
• Optimizing cost of Compensation. (by
establishing some kind of linkage with
performance and compensation)
• Consistency in Compensation. (internal
and external)
Objectives of Compensation
Management
• To ensure desired behavior
• To project in public as progressive
employers
• To comply with wage legislations
Devising a
compensation plan

Job Description

Job Evaluation

Job Hierarchy

Pay Survey

Pricing Jobs
• JOB DESCRIPTION- help to identify important job characteristics
& to determine compensable factors (factors like skill,
experience, effort for which the organization is willing to pay)

• JOB EVALUATION- to establish relative worth of jobs by


assigning points to each degree of a compensable factor

• JOB HIERARCHY- points assigned to all compensable factors


are aggregated. The total points scored will help to establish the
hierarchy of job worth, starting from the highest point total to the
lowest one.

• PAY SURVEYS- prevailing wage & salary rates in the labour


market need to be ascertained

• PRICING JOBS- The job evaluation is matched with the labour


market worth. Two activities are performed-
1. Establishing the appropriate pay level for each job
2. Grouping the different pay levels into pay grades
FACTORS

EXTERNAL INTERNAL
FACTORS FACTORS
Contingent factors in
Compensation Plan
External Factors—
• Nature of Human Resource Market—
Demand and Supply, Productivity, prevailing
Market rates.
• Cost of Living
• Trade Unions
• Legal Framework
• Social Factors
Contingent factors in
Compensation Plan
Internal Factors—
• Organization’s Strategy and Attitudes
• Ability to pay
• Nature of jobs
• Nature of personnel
THEORIES OF
COMPENSATION
In order to understand which components of
remuneration are more effective, we need to
understand the theories of employee
remuneration.

• Reinforcement & Expectancy Theory


• Equity Theory
• Agency Theory

Shows how pay plans can be used to


control employee behavior
1. Reinforcement & Expectancy
theory
• The reinforcement theory states that a behavior which
has a rewarding experience is likely to be repeated.

• High employee performance followed by a monetary


reward will make future employee performance more
likely.

• Similarly, a high performance not followed by a reward


will make its recurrence unlikely in future.

• Like the reinforcement theory, Vroom’s expectancy theory


focuses on the link between rewards and behavior.
2. Equity Theory
The remuneration system needs to meet 3
types of equity since the perception of these
equities directly impacts motivation,
commitment & performance of the employees:

• Internal
• External
• Individual
INTERNAL EQUITY-perceived fairness of pay
differentials among different jobs within an
organization.
EXTERNAL EQUITY- employees’ perception of the
fairness of their remuneration relative to those
outside organization
INDIVIDUAL EQUITY- employee perception of pay
differentials among individuals who hold identical
jobs in the same organization
3. Agency Theory
• It focuses on the divergent role of the
organization’s stakeholders and the way that
employee remuneration can be used to align
these interests.
• Employers & employees are the two
stakeholders in which employer is the
principal & employee is the agent.
• The principal must choose a contracting
scheme that helps align the interest of the
agents with the principal’s own interests.
CONCEPTS OF WAGE
POLICY

There are 3 concepts considered in


Wage Policy:

1. Minimum Wages

2. Fair Wages

3. Living Wage
Wage Structure
• Minimum Wage- must provide bare
substance of life and preservation of the
efficiency of the workers e.g. education,
medical requirements and amenities.
• Living Wage- e.g. measure of frugal
comfort, education for children, protection
against ill-health, requirements of essential
social needs & a measure of insurance
against misfortunes, including old age.
– According to the Committee on Fair Wages, Living Wage is the highest
among the three. Living Wage is supposed to provide :
– - Basic Amenities of Life
– - Efficiency of the worker
– - Satisfy the social needs of the workers such as Medical,
Education, Retirement etc..
Wage Structure
• Fair Wage- It is linked with the capacity of
the industry to pay. It is above the
minimum wage but below the living wage
– According to the Committee on Fair Wages, 1948, following factors
are taken into consideration :
- Productivity of the Labor
- Prevailing rates of wages in same/similar occupations in the
same/neighboring regions.
- Level of National Income & it’s distributions.
- The position of the industry in the economy of the country.
- The employer’s capacity to pay.
Wage Theories
• The Just wage theory- First theory of
medieval period. Worker should be paid to
the level of maintaining himself and his
family.
• Subsistence theory- by David Ricardo
• Standard of living theory (determined by
the mode of production of the country)
Wage Theories
• The wage fund theory- by Adam Smith
relationship between the amount of fund
allocated for the purpose of wage and
number of workers in a country.
• Residual claimant theory- by Francis A
Walker
Amount of wages =
Production Value - (rent + profit + interest)
Wage Theories
• Marginal productivity theory- Henry & John
on the basis of the marginal contributions of
the workers to the production.
• Bargaining theory of wages- John
Davidson
Methods of wage payment
• Time wage method- hour, day, week,
month or any other time base.
• Piece wage method
• Balance method
Essentials of sound wage plan
• Equal pay for equal work
• Simplicity
• Incentive wage
• Minimum guaranteed earnings
• Additional payments and allowances
• Equitable to all
• Easy collective bargaining
Types of Incentive Plans
• Halsey plan
• Rowan Plan
• Taylor’s Differential piece wage plan
• The Emerson efficiency system
• The Gantt system
• Bedeaux point premium plan
3 P’s of Compensation
• Pay for Position

• Pay for Person

• Pay for Performance


Pay for Position
• Position based pay or Job-based pay,
• pays employees for the job to which they
are assigned, regardless of the skills they
possess.
• In other words, pay is centered on the job
or position and not on the person.
•
• Pay for Position is a more traditional pay
structure in which each position is
assigned a pay range based on the job
duties and pay is based on education and
seniority.
Pay for Person
• Person focused pay or Skill-based pay or
Knowledge-based pay or Competency-
based pay structures link pay to the depth
or breadth of the skills, abilities,
competency and knowledge a person
acquires and applies to the work.
• Structures based on skill, pay individuals
for all the skills for which they have been
certified regardless of whether the work
they are doing requires all or just a few of
those particular skills.
• The wage is attached to the person.
Pay for Performance
• Performance related pay, Performance-
based pay is a financial reward system for
employees where some or all of their
monetary compensation is related to how
their performance is assessed relative to
stated criteria.
• The criteria for performance-related pay
scheme may be based on individual,
group or organizational performance, or on
a mixture of them.

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