Compensation management unit 1

Compensation Management is an integral part of the management of he organization.
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. It may achieve several purposes assisting in recruitment,
job performance, and job satisfaction. It is the remuneration received by an employee in
return for his/her contribution to the organization. It is an organized practice that involves
balancing the work-employee relation by providing monetary and non-monetary benefits
to employees. It is a tool used by management for a variety of purposes to further the
existence and growth of the company. It may be attuned according to economic scenario,
the business needs, goals, and available resources. Compensation Management
contributes to the overall success of the organization in several ways. To be effective, the
managers must appreciate the value of competitive pay, their human resources, and have
an investment view of payroll costs. We want to maintain pay levels that attract and
retain quality employees while recognizing the need to manage payroll costs.

The increasing competitiveness of the labour market and turnover of employees had
resulted in nightmare in compensation planning. Apart from this, the growing demands of
the employees and competitive salaries offered by multinational companies had almost
resulted in a compensation war in certain industries. Therefore, the human resources
managers and tax experts have to evolve proper compensation planning for High end and
qualified employees. The components of compensation have to be devised in such a way
that, it focuses on the growing demands of employees while retaining the competitiveness
and profitability of the company.

Compensation management, also known as wage and salary administration, remuneration
management, or reward management, is concerned with designing and implementing
total compensation package. The traditional concept of wage and salary administration
emphasised on only determination of wage and salary structures in organisational
settings. Pay is a difficult topic of conversation in most organizations. In fact, the topic is
altogether taboo in many workplaces. It simply isn’t discussed unless absolutely
necessary. And, when it is necessary, such as when a pay raise (or lack of one) must be
explained to an employee, many managers find themselves at a loss for words. As the
dreaded date of such a discussion approaches, managers may begin checking their sick
time banks to see if they can disappear for a day or two.

While it may be a touchy subject, pay is a critical factor in the work lives of employees.
Jobs are accepted or rejected based in part on starting salary and the opportunity for
future increases in pay. Employees compare their pay to that of others in the same line of
work. They constantly compare their pay level to their level of contribution, trying to
determine whether the ratio of give and receive is a fair one. While it may not be a
frequent topic of open discussion, employees think about pay often.

Components of compensation:-

Basic wages/Salaries:-

These refer to the cash component of the wage structure based on which other elements
of compensation may be structured. It is normally a fixed amount which is subject to
changes based on annual increments or subject to periodical pay hikes. Wages represent
hourly rates of pay, and salary refers to the monthly rate of pay, irrespective of the
number of hours put in by the employee. Wages and salaries are subject to the annual
increments. They differ from employee to employee, and depend upon the nature of job,
seniority, and merit.

Dearness allowance:-

The payment of dearness allowance facilitates employees and workers to face the price
increase or inflation of prices of goods and services consumed by him. The onslaught of
price increase has a major bearing on the living conditions of the labour. The increasing
prices reduce the compensation to nothing and the money’s worth is coming down based
on the level of inflation. The payment of dearness allowance, which may be a fixed
percentage on the basic wage, enables the employees to face the increasing prices.

Incentives:-

Incentives are paid in addition to wages and salaries and are also called ‘payments by
results’. Incentives depend upon productivity, sales, profit, or cost reduction efforts.
There are: (a) Individual incentive schemes, and (b) Group incentive programmes.
Individual incentives are applicable to specific employee performance. Where a given
task demands group efforts for completion, incentives are paid to the group as a whole.
The amount is later divided among group members on an equitable basis.

Bonus:-

The bonus can be paid in different ways. It can be fixed percentage on the basic wage
paid annually or in proportion to the profitability. The Government also prescribes a
minimum statutory bonus for all employees and workers. There is also a bonus plan
which compensates the Managers and employees based on the sales revenue or Profit
margin achieved. Bonus plans can also be based on piece wages but depends upon the
productivity of labour.

Non-monetary benefits:-

These benefits give psychological satisfaction to employees even when financial benefit
is not available. Such benefits are: (a) Recognition of merit through certificate, etc. (b)
Offering challenging job responsibilities, (c) Promoting growth prospects, (d)
Comfortable working conditions, (e) Competent supervision, and (f) Job sharing and
flexi-time.

Commissions:-

Commission to Managers and employees may be based on the sales revenue or profits of
the company. It is always a fixed percentage on the target achieved. For taxation
purposes, commission is again a taxable component of compensation.The payment of
commission as a component of commission is practised heavily on target based sales.
Depending upon the targets achieved, companies may pay a commission on a monthly or
periodical basis.

Mixed plans:-

Companies may also pay employees and others a combination of pay as well as
commissions. This plan is called combination or mixed plan. Apart from the salaries paid,
the employees may be eligible for a fixed percentage of commission upon achievement of
fixed target of sales or profits or Performance objectives. Nowadays, most of the
corporate sector is following this practice. This is also termed as variable component of
compensation.

Piece rate wages:-

Piece rate wages are prevalent in the manufacturing wages. The laborers are paid wages
for each of the Quantity produced by them. The gross earnings of the labour would be
equivalent to number of goods produced by them. Piece rate wages improves productivity
and is an absolute measurement of productivity to wage structure. The fairness of
compensation is totally based on the productivity and not by other qualitative factors.

Fringe benefits:-

Fringe 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
job factors and performance. Fringe benefits constitute indirect compensation as they are
usually extended as a condition of employment and not directly related to performance of
concerned employee. Fringe 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. Such 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.

Profit Sharing: –

Profit-sharing is regarded as a steppingstone to industrial democracy. Profit-sharing is an
agreement by which employees receive a share, fixed in advance of the profits. Profit-
sharing usually involves the determination of an organisation’s profit at the end of the
fiscal year and the distribution of a percentage of the profits to the workers qualified to
share in the earnings. The percentage to be shared by the workers is often predetermined
at the beginning of the work period and IS often communicated to the workers so that
they have some knowledge of their potential gains. To enable the workers to participate

in profit-sharing, they are required to work for certain number of years and develop some
seniority. The theory behind profit-sharing is that management feels its workers will
fulfill their responsibilities more diligently if they realise that their efforts may result in
higher profits, which will be returned to the workers through profit-sharing.

Approaches of compensation management

There are 3P approach of developing a compensation policy centered on the
fundamentals of paying for Position, Person and Performance. Drawing from external
market information and internal policies, this program helps establish guidelines for an
equitable grading structure, determine capability requirements and creation of short and
long-term incentive plans.

The 3P approach to compensation management supports a company’s strategy, mission and
objectives. It is highly proactive and fully integrated into a company’s management
practices and business strategy. The 3P system ensures that human resources
management plays a central role in management decision making and the achievement of
business goals.

• Paying for position
• Paying for person
• Paying for performance

Because it is so important to employees, the issue of pay deserves to be clearly addressed.
In spite of their hesitance, managers are capable of dealing with this sometimes difficult
issue in a professional and effective manner. By keeping the following basic points about
pay in mind, they can address virtually any pay-related topic with their employees in a
professional and productive manner.

Specificity is Key

Pay is a topic with many different shades and a variety of implications. Whenever
approaching the subject, it is important to work out the details beforehand so that
specifics can be clearly communicated. For the manager, this means that the increase
amount is nailed down before discussing a promotion with an employee. No chance of
misunderstanding or false expectations can be permitted. Far too often, managers are apt
to discuss generalities. “It will mean a good increase.” What exactly does that mean in
terms of the employee’s monthly budget? If care is not taken here, good news can
become the source of conflict and resentment.

By the same token, if asked for a raise, the manager should request that the employee
suggest a specific number that he believes reflects his value. Once the employee provides
that number, the manager can do his homework and decide what, if anything can be done.
The employee can then be given a definitive response.

Pay is Relative

What one employee considers a fantastic increase maybe an insult to another? Each
individual has a unique set of creativity and competencies. Pay should be based on the
performance, position and the competencies/skills the person is having.

Pay is Not Created Equal

Various forms of pay have different purposes. The two most common forms of direct
cash compensation in most companies are base pay and bonus. Base pay is the annual
salary or hourly wage paid to an employee given the job he holds, While bonus is
typically (or at least should be) rewarded based on the achievement of a goal of the
organization. Discussions about bonus payments should be as specific as possible. This is
the opportunity to point out particular accomplishments that contributed to overall team
or company success. Even if the bonus is paid to all employees based on a simple overall
company profit target, the manager should use the opportunity to point out specifically
how individual employees helped achieve that target.

Distributing bonus checks presents a unique motivational opportunity for a manager.
Handing money to an employee while discussing actions and behaviors he would like to
see repeated, creates a powerful link between performance and reward. Discussions about
base pay increases can be a bit different. Most companies claim to link their annual base
pay increases to performance. In reality, however, base pay decisions take into account a
variety of factors, including the relative pay of others in the same job, the company’s
increase budget, market practices and where the individual falls within his pay range.

Even when performance is a factor, the manager is faced with the difficult task of
evaluating an entire year’s worth of activity and then categorizing it according to the
percentage increase options allowed by the budget. It becomes very difficult to pinpoint
specific employee actions or accomplishments as the reason for the increase.

For these reasons, it’s appropriate for the discussion about base pay increases to be more
general and balanced. Both strengths and weaknesses of the employee should be
addressed. The actual increase is then based on an overall assessment, as opposed to a
link with one or two specific outcomes. Any other factors that impact the increase
percent, such as budget or pay range should be openly discussed as well.

Compensation management unit 1

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Compensation management unit 1