Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.

UNIT – V
COMPENSATION MANAGEMENT, INDUSTRIAL RELATIONS AND
EMERGING HR PRACTICES

COMPENSATION
Compensation is the reward that the employees receive in return for the work
performed and services rendered by them to the organization. Compensation includes
monetary payments like bonuses, profit sharing, overtime pay, recognition rewards and sales
commission, etc., as well as nonmonetary perks like a company-paid car, company-paid
housing and stock opportunities and so on. Apart from the basic financial pay the employees
receive paid vacations, sick leave, holidays and medical insurance, maternity leave, free
travel facility, retirement benefits, etc., and these are called benefits.
Compensation is a vital part of human resource management decision making as it
helps in encouraging the employees and improves the organizational effectiveness.
Compensation packages with good pay and benefits help to attract and retain the best
employees. Employees consider pay package to be fair when the amount of wage covers
basic living expenses, keep up with inflation, leave some money for savings (perhaps for
retirement) and leisure and there is increment over time.
Compensation may be defined as money received in performance of work and many
kinds of services and benefits that an organization provides to their employees. It may help to
achieve several purposes, such as recruitment, job performance and job satisfaction. It
represents both, the intrinsic (psychological mind-sets resulting from job performance) and
extrinsic (including both monetary and non-monetary) rewards. The term, compensation
refers to all forms of financial returns and tangible benefits that an employee receives as a
part of employment relationship. In the globalization era, where the business environment has
become increasingly complex and challenging, designing an effective compensation program
to attract and retain talent is an important function of organizational effectiveness.

Concept of Compensation:
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. It is a tool used by management for a variety of purposes to
further the existence of the company. It may be adjusted according to the business needs,
goals and available resources.
1. Individual worth: The value of a job is related to similar jobs of the company or the
competitors but the value of an individual to perform that job may vary according to
his/her skill/knowledge, expertise and more so his behaviour on the job and with
associating persons. The combinations of these attributes decide the worth of
individual. This definition is a perception of the employees.
2. Cost to Company: Human resource is considered as an asset to the organisation. The
investment on this asset by the company with respect to skill, competence or expertise
is a cost to the company and the employer’s intention is to make aware the employees
that he/she has to ensure return on this investment through his/her consistent and
continuous performance.
3. Flexible Compensation Package: Employees are being offered compensation
structure with numbers of benefits to choose to plan tax plan and provide freedom to
choose to get maximum benefit.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.2

OBJECTIVES OF COMPENSATION
1. To Establish a Fair and Equitable Remuneration: Effective compensation
management objectives are to maintain internal and external equity in remuneration paid
to employees. Internal equity means similar pay for similar work.
2. To Attract Competent Personnel: A sound wage and salary administration helps to
attract qualified and hard- working people by ensuring an adequate payment for all jobs.
3. To Retain the Present Employees: By paying competitive levels, the company can
retain its personnel. It can minimize the incidence of quitting and increase employee
loyalty.
4. To Improve Productivity: Sound wage and salary administration helps to improve the
motivation and morale of employees which in turn lead to higher productivity
5. To Control Cost: Through sound compensation management, administration and labour
costs can be kept in line with the ability of the company to pay. If facilitates
administration and control of pay roll. The companies can systematically plan and control
labour costs.
6. To Improve Union Management Relations: Compensation management based on jobs
and prevailing pay levels are more acceptable to trade unions. Therefore, sound wage and
salary administration simplifies collective bargaining and negotiations over pay. It
reduces grievances arising out of wage inequities.
7. To Improve Public Image of the Company: Wage and salary programme also seeks to
project the image of the progressive employer and to company with legal requirements
relating to wages and salaries.
8. To Improve Job Satisfaction: If employees would be happy with their jobs and would
love to work for the company if they get fair rewards in exchange of their services.
9. To Motivate Employees: Employees: Some of them want money so they work for the
company which gives them higher pay. Some of them value achievement more than
money; they would associate themselves with firms which offer greater chances of
promotion, learning and development.
10. Peace of Mind: Offering of several types of insurances to workers relieves them from
certain fears; as a result workers now work with relaxed mind.
11. Increases Self-Confidence: Every human being wants his/her efforts to get
acknowledgment. Employees gain more and more confidence in them and in their
abilities if they receive just rewards.

PRINCIPLES OF COMPENSATION
The following principles should be followed for an effective compensation management:
1. Compensation policy should be developed by taking into consideration of the views of
employers, the employees, the consumers and the community.
2. The compensation policy or wage policy should be clearly defined to ensure uniform and
consistent application.
3. The compensation plan should be matching with overall plans of the company.
Compensation planning should be part and parcel of financial planning
4. Management should inform the wage/salary related policies to their employees. Workers
should be associated in formulation and implementation of wage policy.
5. All wage and salary related decisions should be checked against the standards set in
advance in the wage/salary policy
6. To manage compensation related matters adequate information/data should be developed
and stored for future planning and execution.
7. The compensation policy and programme should be reviewed and revised periodically in
conformity with changing needs.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.3

FACTORS INFLUENCING COMPENSATION

The wage payment is an important factor affecting the labor management relations.
Workers are very much concerned with the rates of wages as their standard of living is linked
to the amount of remuneration they get. Managements, however, do not come forward to pay
higher wages because cost of production goes up and profits decrease to that extent. A
number of factors, thus, influence the remuneration payable to the employees. The factors
influencing compensation can be categorized into external and internal Factors.

External factors
1. Demand and supply: The labor market conditions or demand and supply forces
operate at the national and local levels and determine organizational wage structure.
When the demand of a particular type of labor is more and supply is less than the
wages will be more. On the other hand, if supply of labor is more demand on the other
hand, is less then persons will be available at lower wage rates also.
2. Cost of living: The wage rates are directly influenced by cost of living of a place. The
workers will accept a wage which may ensure them a minimum standard of living.
3. Trade unions bargaining power: The wage rates are also influenced by the
bargaining power of trade unions. Stronger the trade union higher will be the wage
rates. The strength of a trade union is judged by its membership, financial position
and type of leadership. Union’s last weapon is strike which may also be used for
getting wage increases. If the workers are disorganized and disunited then employers
will be successful in offering low wages.
4. Government legislation: To improve the working conditions of workers, government
may pass legislation for fixing minimum wages of workers. This may ensure them a
minimum level of living. In under developed countries bargaining power of labor is
weak and employers try to exploit workers by paying them low wages. In India,
Minimum Wages Act, 1948 was passed to empower government to fix minimum
wages of workers.
5. Psychological and social factors: Management should take into consideration the
psychological needs of the employees while fixing the wage rates so that the
employees take pride in their work. Sociologically and ethically, the employees want
that the wage system should be equitable, just and fair. These factors should also be
taken into consideration while devising a wage program.
6. Economy: Economy also has its impact on wage and salary fixation. A depressed
economy will probably increase the labor supply. This, in turn, should lower the going
wage rate.
7. Technological development: With the rapid growth of industries, there is a shortage
of skilled resources. The technological developments have been affecting skills levels
at faster rates. Thus, the wage rates of skilled employees constantly change and an
organization has to keep its level up-to the mark to suit the market needs.
8. Prevailing market rates: No enterprise can ignore prevailing or comparative wage
rates. The wage rates paid in the industry or other concerns at the same place will
form a base for fixing wage rates. If a concern pays low rates then workers leave their
jobs whenever they get a job somewhere else. It will not be possible to retain good
workers for long.

Internal factors
1. Ability to pay: The ability to pay of an enterprise will influence wage rates to be
paid. If the concern is running into losses then it may not be able to pay higher wage

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.4

rate. A profitable concern may pay more to attract good workers. During the period of
prosperity, workers are paid higher wages because management wants to share the
profits with labour.
2. Job requirements: Basic wages depend largely on the difficulty level, and physical
and mental effort required in a particular job. The relative worth of a job can be
estimated through job evaluation. Simple, routine tasks that can be done by many
people with minimum skills receive relatively low pay. On the other hand, complex,
challenging tasks that can be done by few people with high skill levels generally
receive high pay.
3. Management strategy: The overall strategy which a company pursues should
determine to remuneration to its employees. Where the strategy of the organization is
to achieve rapid growth, remuneration should be higher than what competitors pay.
Where the strategy is to maintain and protect current earnings, because of the
declining fortunes of the company, remuneration level needs to be average or even
below average.
4. Employee: Several employees related factors interact to determine his remuneration.
a) Performance: Productivity is always rewarded with a pay increase. Rewarding
performance motivates the employees to do better in future.
b) Seniority: Unions view seniority as the most objective criteria for pay increases
whereas management prefers performance to affect pay increases.
c) Experience: Makes an employee gain valuable insights and is generally rewarded.
d) Potential: Organization does pay some employees based on their potential. Young
managers are paid more because of their potential to perform even if they are short
of experience.

EMERGING TRENDS IN COMPENSATION

Integration of compensation criteria into corporate objectives is becoming
increasingly important. The organizations are realizing the need for a new benchmarking for
deciding the reward for the employees with a view to attract, retain, and to motivate the best
brains to contribute at the maximum of their capacity. Therefore, the rewards for an employee
must ensure fairness vis-a-vis compensation standards in the industry, a fair deal in
comparison to his colleagues and his unique contribution to the company.
To achieve the above purpose the following new methods of compensation are being
adopted by various organizations:
1. Increased Emphasis on Merit or Performance Related Pay (PRP): Under this
method the individual’s increase in compensation is solely dependent on his/her
performance appraisal or merit rating. This rating not only take into consideration to
output on the job but also other indicators such as – quality, flexibility, job behaviour,
contribution to team working and ability to achieve the goals. This method is
primarily used for managerial levels, although attempts are being made to introduce it
at lower levels also but so far, it has not been very successful. This method helps to:
a) increase the attractiveness of salaries in order to improve recruitment and
retention as it sends the right message in rewarding those whom the
organization wants to keep and not those whom organizations would prefer to
lose.
b) facilitate change in organization culture to encourage desired qualities among
employees, like flexibility, dynamism, entrepreneurial spirit, etc.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.5

c) weaken trade unions; since the compensation would be performance based

rather than through collective bargaining or negotiations with the
management. This may also lead to the removal of grievances of the
employees as most of the grievances are due to compensation issues and thus a
consequential reduction in support for the trade unions.
d) increase the role of the line managers, the managers would be required to pay
more attention to evaluating the performance of their subordinates and
discussing with them the methods to improve their performance.
e) improve the performance and advancement in their career through
development – since the employees will be getting constant feedback on their
performance, they would develop desire to improve themselves for better
compensation.
2. Flexible Compensation Schemes-Cafeteria Benefits: The organizations are facing
the problem of adjusting the salaries of new comers at all levels in the existing
compensation structure as they come from different organizations and enjoying
different benefits – both monetary and non-monetary. Such organizations may use this
flexible compensation scheme called Cafeteria Benefits which is recommended,
especially for the managerial employees. Under this scheme, the overall price is fixed
for each level with a menu of benefits.
Each employee is allowed to pick the benefits within the overall limit. Thus,
the employees are able to decide which benefits they prefer and how to balance the
amount of compensations they are to get. This scheme also provides enough
flexibility to the employees to plan their income tax apart from helping them increase
their motivation. However, this scheme has not been adopted on large scale by
companies, as the employees tend to compare the benefits different employees are
enjoying and they want all those benefits which any other employee is enjoying
without realising that they had exercised their option in favour of other benefits the
principle of equity is raised in support of their argument.
3. Harmonisation: Harmonisation is a process of bringing different conditions of
service into some sort of alignment. The purpose is to have a single status for all
employees in the organization by having same salary structure. This could be
achieved by –
a) Gradual elimination of differences between different categories of employees’
conditions of employment, like holidays, working hours, use of punch cards,
deductions for late coming, separate canteens,
b) Single status, which means all employees are treated equally in all aspects of
employment except pay.
c) Extending staff status to certain non – staff employees,
d) Providing similar fringe benefits including transport, catering, medical care,
education facilities for children of all employees, etc.
The advantages of this system are that it seeks to bring in a measure of equity
and fair play and contribute to the improvements in employee attitudes and
performance apart from simplification of payroll procedures and fringe benefit
administration.
4. Decentralisation of Payment Systems: With the organizations becoming multi-
technology, multi-location, multinational, there seems to be increasing interest in the
decentralisation of compensation determination with a view to take the local financial
performance and labour market conditions into consideration. The disadvantage of
this method in India is that the employees tend to compare and ask for those benefits
which could benefit them, irrespective of their location. Although in the Public Sector

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.6

and the Government Departments, the quantum of allowances vary but by and large
the allowances, head-wise, remain the same. Although, this system is the need of the
hour, but it should be introduced very carefully so that it does not cause any
dissatisfaction among employees at various locations or units.
5. Contingency Theory: After going through the different systems, it may be concluded
that there is no best way to design a compensation system which would be suitable for
the organizations under all conditions. The management must take into account
factors such as – the type of product it manufactures, the technology it uses, the
characteristics of the labour force available and the market conditions of the labour.
The organizations must keep on designing and inventing newer and innovative
schemes and benefits to remain ahead of the competitors, market demands and
practices, to attract, the employees to the fold of the organization. The schemes should
also encourage employees to go for training in multiple skills, accept redeployment
and relocation. The compensation systems do not operate within vacuum-
remuneration strategies. Both affect, and are affected by all aspects of the
employment relationship. Thus, the design of compensation systems should not only
be integrated with other human resource management policies but also reflect and
perpetuate the overall objectives of the organization.
6. Changing Practices in Compensation Management in India: The present day trend
in compensation management has moved from fixed salary grades and fixed
allowances to more flexible grades and allowances/reimbursements. The grades are
being used these days to indicate the starting or the minimum salary for a particular
level, and the allowances are being worked out in ranges so that the varying demands
of new employees in terms of emoluments could be met. In addition, it is being
observed that different companies have large number of components for paying to the
employees the compensation package. Some of the companies have even system of
giving freedom to the employees to determine and work out the distribution of the
compensation under different heads themselves.

COMPONENTS OF COMPENSATION
1. Basic Wages/Salaries: Basic wages/salaries 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.
2. 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.
3. 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: Individual incentive schemes, and Group incentive
programmes. Individual incentives are applicable to specific employee performance.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.7

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.
4. 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.
5. Non-Monetary Benefits: These benefits give psychological satisfaction to employees
even when financial benefit is not available. Such benefits include recognition of
merit through certificate, etc., offering challenging job responsibilities, promoting
growth prospects, and Comfortable working conditions.
6. 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.
7. Mixed Plan: Companies may also pay employees and others a combination of pay as
well as com- missions. 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.
8. 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.
9. 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 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 organization over a long period.
10. Profit Sharing: Profit-sharing is regarded as a stepping stone 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
organization’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.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.8

TYPES OF COMPENSATION / BASE AND SUPPLEMENTARY COMPENSATION

I. Direct /Base Compensation

1. Basic Salary: Salary is the amount received by the employee in lieu of the work done
by him/her for a certain period say a day, a week, a month, etc. It is the money an
employee receives from his/her employer by rendering his/her services
2. House Rent Allowance: Organizations either provide accommodations to its
employees who are from different state or country or they provide house rent
allowances to its employees.
3. Conveyance: Organizations provide for cab facilities to their employees. Few
organizations also provide vehicles and petrol allowances to their employees to
motivate them.
4. Leave Travel Allowance: These allowances are provided to retain the best talent in
the organization. The employees are given allowances to visit any place they wish
with their families. The allowances are scaled as per the position of employee in the
organization.
5. Medical Reimbursement: Organizations also look after the health conditions of their
employees. The employees are provided with medi-claims for them and their family
members.
6. Bonus: Bonus is paid to the employees during festive seasons to motivate them and
provide them the social security. The bonus amount usually amounts to one month’s
salary of the employee.
7. Special Allowance: Special allowance such as overtime, mobile allowances, meals,
commissions, travel expenses, reduced interest loans; insurance, club memberships,
etc are provided to employees to provide them social security and motivate them
which improve the organizational productivity.

II. Indirect /Supplementary Compensation

1. Leave Policy: It is the right of employee to get adequate number of leave while
working with the organization. The organizations provide for paid leaves such as,
casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.
2. Overtime Policy: Employees should be provided with the adequate allowances and
facilities during their overtime, if they happened to do so, such as transport facilities,
overtime pay, etc.
3. Hospitalization: The employees should be provided allowances to get their regular
check-ups, say at an interval of one year. Even their dependents should be eligible for
the medi-claims that provide them emotional and social security.
4. Insurance: Organizations also provide for accidental insurance and life insurance for
employees. This gives them the emotional security and they feel themselves valued in
the organization.
5. Leave Travel: The employees are provided with leaves and travel allowances to go
for holiday with their families. Some organizations arrange for a tour for the
employees of the organization. This is usually done to make the employees stress free.
6. Retirement Benefits: Organizations provide for pension plans and other benefits for
their employees which benefits them after they retire from the organization at the
prescribed age.
7. Holiday Homes: Organizations provide for holiday homes and guest house for their
employees at different locations. These holiday homes are usually located in hill
station and other most wanted holiday spots.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.9

8. Flexible Timings: Organizations provide for flexible timings to the employees who
cannot come to work during normal shifts due to their personal problems and valid
reasons.

TYPES OF COMPENSATION/PAYMENTS
Determination of reasonable wages is a difficult task for the management and so they
should give adequate attention to this area. However, different types of wage payment can be
divided into three parts:
1. Time wage
2. Piece wage
3. Wage incentive plan

1. Time Wage System: In this method, payment on the basis of time spent in the factory
irrespective of amount of amount of work done. The worker is paid at an hourly, daily,
weekly or monthly rate.
Ex: suppose a worker is paid at the rate of Rs.10/- per hour and he spent 220 hours
during a particular month, his wage will be Rs.2200.
There are five types in this system:
1. Flat Time Rate or time rate at ordinary level: It is the oldest method of wage
payment. Under this method, workers are paid at a flat rate on the basis of time they
are employed.
2. High Day Rate or time rate at high wage level: The rare of wages is fixed by hour
or day but the rate fixed is relatively higher. Higher rate is given to attract the efficient
workers.
3. Measured Day Rate: Workers under this method are given a specified work to be
performed and the rate is fixed in accordance with the level of performance specified
by the employer.
4. Graduated Time Rate: Under this method, the rates of wages are linked up with the
cost of living index. The rate per hour or day fixed goes on changing with the cost of
living index.
5. Differential Time Rate: Under this method, different rates of wages are fixed for
different workers in the same group according to the differences in their personal
abilities and skill.

2. Piece Rate System: In this method, payment on the basis of the work done irrespective of
time taken by the worker. A fixed rate is paid for each unit produced, job completed or an
operation performed.
Ex: A worker is paid at the rate of Rs.5/- per unit and produces 50 units during the
day, he will get Rs.250/-.
There are four variants of this system:
1. Straight Piece Rate System: In this method of payment in which payment is made
according to the number of units produced at fixed rate per unit.
2. Taylor’s Differential Piece Rate System: This system was introduced by
F.W.Taylor, the father of scientific management. His view was to give a large reward
to those who could complete the work within or less than the standard time and less
wage to those who would complete the job within standard time. Taylor plan is based
on wages per unit. In other words, a worker is paid wages in accordance with his
output. Higher price rate is fixed for the workers who give production over and above

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.10

the standard workload fixed. The lower rate is fixed for the workers who give
production below the standard workload fixed.
3. Merrick’s Multiple Piece Rate System: Under this method, three piece rates are
applied for workers with different levels of performance as follows:
a. Wages are paid at ordinary piece rate to those workers whose performance is
less than 83% of standard output.
b. 110% of ordinary piece rate is given to workers whose level of performance is
between 83% and 100% of standard output.
c. 120% of the ordinary piece rate is given to workers who produce more than
100% of standard output.
4. Gant’s Task and Bonus Plan: A standard time is fixed for doing a particular task,
worker’s actual performance is compared with the standard time and his efficiency is
determined. It is also known as Progressive Rate System”.
a. If a worker’s performance is 100% or more than 100%, he is given a piece
wage plus bonus at 20% of piece wages.
b. If his efficiency is below 100%, he is given the wage for the time taken to
perform the task.
5. Emerson Plan: This plan is a combination of Taylor, Merrick and Gantt plans.
However, a slight modification in these plans has been made and different rates of
bonus have been fixed under this plan. The amount of bonus increases with the
increase in efficiency. These percentages are as under:
1% bonus on 67.5% efficiency
10% bonus on 90% efficiency
20% bonus on 100% efficiency
20% + 30% extra on bonus on efficiency more than 100%
6. Profit-Sharing Scheme: Under this scheme, workers are given a certain percentage
of profits as bonus. But it suffers from one defect. Suppose, there is no profit in a
particular year, workers will also not be given the bonus for that very year. The
workers think that they have been deceived by the employers and therefore, clash with
them on this very issue. This assumes the form of worker-management unrest and has
its bad effect on the production. This scheme is undoubtedly a new and better scheme.
But, the trade unions misuse the scheme.
7. Scalan Plan: Under this scheme, the workers are paid bonus equal to the percentage
of profits earned more than the profits earned last year by the organisation. 15% of the
bonus is deducted and this deduction is deposited in the fund which is distributed
among the workers in the year to come.

3. Wage Incentive Plan: It is also known as premium and bonus plan. Under this plan, a
standard time is fixed to complete a job and the worker is paid for time taken to complete
the job at an hourly rate plus wages for time saved on the standard by way of bonus.
Some of the important premium plans are:
1. Halsey Premium Plan: Under this method, standard time for doing each job is fixed
and the worker is given wages for the actual time he takes to complete the job at an
agreed rate per hour plus a bonus equal to one-half of the wages of the time saved. For
example, if a worker gives an output more than the fixed standard job, he is given
about 33% to 50% of the remuneration for that job as bonus. Here a standard of
output is fixed and a standard of time is also fixed for the completion of that job
beforehand. If the job of fixed standard is completed with the standard time fixed for
the purpose, the worker gets his fixed wages. But, if he completes the job before the

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.11

fixed standard time and, thereby, saves some time, he gets a fixed percentage of his
wages for the time so saved as bonus.
T x R + % (S – T) R
Where, T is the time taken
R is the labor rate per hour
S is the standard time
% is the percentage of wages of time saved

2. Rowan Premium Plan: This plan is an improvement upon Halsey Plan. Under this
method, the worker is guaranteed wages at the ordinary rate for the time taken by him
to complete the job. The bonus is a fixed percentage of the wages of the time saved
bears to the standard time allowed. The premium is that proportion of the wages for
the time taken which the time saved bears to the standard time. The credit of this
incentive premium method goes to Rowan of Scotland. The worker is paid wages at
normal rates for the duration he has worked and is paid extra money in the form of
premium on the basis of the time he has saved. Under this scheme, the standard work
and the standard time both are fixed. The wages for the time saved will increase in the
same percentage that is equal to the proportion the time saved bears to standard time.
The premium for the time saved cannot be more than the total standard wages. Thus, a
worker cannot get cleverly wages more than needed.
Bonus is calculates as:
[(S – T) / S] T x R
Total earnings is calculates as: [T x R + (S – T) / S] x R
Where, S = Standard time
R = Rate per hour
T = Actual time taken

PROBLEMS
1. Calculate the earnings of workers A and B under
a. Straight piece rate system
b. Taylor’s differential piece rate system
c. Merrick’s multiple piece rate system
d. Gant’s Task
From the following particulars:
Normal time per hour Rs.18
Standard time per unit 20 seconds
Differentials to be applied:
80% of piece rate below standard
120% of piece rate at or above standard
Worker A produces 1300 units per day and worker B produces 1500 units per day.
Working hours per day are 8 hours.

Solution:
Standard production per 20 seconds = 1 unit
Standard production per minute = 60 min. / 20 sec. = 3 units
Standard production per hour = 3 units x 60 min. = 180 units
Standard production per day of 8 hours = 180 units x 8 hrs. = 1440 units

Normal rate per hour = Rs.18

Normal piece rate = Rs.18 / 180 units = Rs.0.10

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.12

Low piece rate below standard production = (0.10 x 80) / 100 = Rs.0.08
High piece rate above or at standard production = 0.10x 120 /100 = Rs.0.12

Under Straight piece rate system:

Earnings of worker-A = 1300 units x 0.10 = Rs.130/-

Earnings of worker-B = 1500 units x 0.10 = Rs.150/-

Under Taylor’s differential piece rate system:

Worker-A= 1300 units x 0.08 = Rs.104/-
(piece rate per unit = 0.10 x 80/100=0.08)
(Note: Low piece rate is applied because his daily production of 1300 units is less
than standard production of 1400 units i.e. 80%).

Worker-B = 1500 units x 0.12 = Rs.150/-

(piece rate per unit = 0.10 x 120/100=0.12)
(Note: High piece rate is applied as his daily productionis1500 units which is more
than standard production of 1440 units i.e. 120%).

Under Merrick’s multiple piece rate system:

Worker-A = for 1300 units @ 0.11 paise
= 1300 x 0.11 = Rs.143/-
Level of performance = 1300 units x 100 / 1440 units = 90%
Where, standard performance = 1440 units
Output per day = 1300 units
100% performance = 1440 units
? = 1300 units

Worker-B= for 1500 units @ .011 paise

= 1500 x 0.11 = Rs.165/-
Level of performance = 1500 units x 100 / 1440 units = 140%
Where, standard performance = 1440 units
Output per day = 1500 units
100% performance = 1440 units
? = 1500 units
Note: The level of performance for worker A & B is 90% and 104% which is between 83%
and 100%, so they are entitled to get 110% of normal piece rate i.e. [110% of 0.10 paise =
0.10 x 110 / 100 = 0.11 paise]

INCENTIVES AND REWARDS

INCENTIVES
Incentives imply the extraneous persuading factor of stimulating employees. It pulls
the strings of employee’s behaviour, directing them to put more efforts into work, so as to
match the standard performance level, in the company. It arises from the need for the
employees to be acknowledged and appreciated, for their hard work and dedication.
Practically, appreciating the employees when the appreciation is due, satisfies their internal

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.13

desires. Hence it can be anything which grabs the attention of employees and instigates them
to work continuously for achieving it. It is regarded as the most important determinant of
worker’s motivation, which drives them to put more efforts in their work, by encouraging
them and increasing their enthusiasm. This is a great way to gain job satisfaction, as it tends
to increase the interaction between the employer and employee. It encompasses various plans
proposed by the firm, to encourage employees or teams in timely reaching the targets, such as
team incentives, target-based plans, sports awards, profit-sharing plans and skill-based plans.
REWARDS
A reward is a prize, which an employer gives to his/her employees for performing the
job exceptionally. On the other hand, the incentive is a motivational factor, which constantly
encourages the employee to do better in their work. Human Resource Management uses a
strategic approach to manage its workforce in an effective manner. To improve the level of
performance, various system or programmes are implemented, such as reward and
recognition, incentives and so forth. Hence, reward system, reward strategy, reward policy,
incentive plan, incentive programme, incentive structure, etc. are just the tools of human
resource management to regulate the behaviour of employees. So, let us start the discussion
on the difference between reward and incentive.
In simple words, the reward is the accolade given to the employee for performing a
task, rendering a service or taking a responsibility, which can be monetary or non-monetary.
It is aimed at recruiting and retaining the kind of employees which the company requires
while promoting the behavior that contributes effectively to the accomplishment of the
organizational goals. It is like giving him/her something over and above the regular
consideration, at the same level, to recognize the efforts. The concept of fair day’s work has
blurred these days, and it is replaced by a competitive remuneration package, which contains
novel methods of offering benefits. The reward is a tangible consideration for the services
rendered by the employee to the company.

Advantages of the Reward System

1. It demonstrates the employee that his/her work and performance is appreciated and
recognized.
2. It also attracts competent persons working with other organizations and keep the
talented ones for the long term.
3. It maintains healthy competition amidst employees to achieve the goals.
4. It develops a sense of commitment and dedication among employees.
5. It boosts the morale of the employees, improves their productivity and efficiency, and
also encourages them to maintain quality in their work.

Basis For
Reward Incentive
Comparison

Meaning The reward can be understood as a The incentive is anything which

prize given to someone, so as to motivates, or encourages an
recognize an employee's hard work or employee, to achieve something.
achievement.

What is it? A tangible item that is given to Motivational factor designed to

congratulate and celebrate success or tune the desired behavior.
achievement.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.14

Basis For
Reward Incentive
Comparison

Predetermined No Yes

Nature Retrospective Forward-looking

Involves Providing monetary or non-monetary Motivating people to complete

recognition for achieving a goal, or targets or level up their
attaining a certain level of skills. performances.

Objective To appreciate and recognize people for To motivate employees to

the work done. achieve something.

Reward and incentive schemes are not just important for employees, but employers
too, as it retains and motivates employees, as well as improves their productivity. This is due
to the fact that it directs the employee’s capabilities to work efficiently so as to achieve the
company’s goals. Put it another way, if an effective reward and incentive system is absent in
an organization, it may negatively influence the work of the employees; indeed, they are
likely to switch the company which offer better remuneration for their work. In short, it will
decrease their performance level, and thus the goals of the organization may not be achieved.

MANAGING INDUSTRIAL RELATIONS

Maintenance of harmonious industrial relations is on vital importance for the survival
and growth of the industrial enterprise. Good industrial relations result in increased efficiency
and hence prosperity, reduced turnover and other tangible benefits to the organization.
According to Dale Yoder’, IR is a designation of a whole field of relationship that exists
because of the necessary collaboration of men and women in the employment processes of
Industry”.
The significance of industrial relations can be summarized as below:
1. It establishes industrial democracy: Industrial relations means settling employee’s
problems through collective bargaining, mutual cooperation and mutual agreement
amongst the parties i.e., management and employees’ unions. This helps in
establishing industrial democracy in the organization which motivates them to
contribute their best to the growth and prosperity of the organization.
2. It contributes to economic growth and development: Good industrial relations lead
to increased efficiency and hence higher productivity and income. This will result in
economic development of the country.
3. It improves morale of the work force: Good industrial relations, built-in mutual
cooperation and common agreed approach motivate one to contribute one’s best,
result in higher productivity and hence income, give more job satisfaction and help
improve the morale of the workers.
4. It ensures optimum use of scare resources: Good and harmonious industrial
relations create a sense of belongingness and group-cohesiveness among workers, and
also a congenial environment resulting in less industrial unrest, grievances and
disputes. This will ensure optimum use of resources, both human and materials,
eliminating all types of wastage.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.15

5. It discourages unfair practices on the part of both management and

unions: Industrial relations involve setting up machinery to solve problems
confronted by management and employees through mutual agreement to which both
these parties are bound. This results in banning of the unfair practices being used by
employers or trade unions.
6. It prompts enactment of sound labour legislation: Industrial relations necessitate
passing of certain labour laws to protect and promote the welfare of labour and
safeguard interests of all the parties against unfair means or practices.
7. It facilitates change: Good industrial relations help in improvement of cooperation,
team work, performance and productivity and hence in taking full advantages of
modern inventions, innovations and other scientific and technological advances. It
helps the work force to adjust them to change easily and quickly.

EMERGING TRENDS AND PRACTICES IN HUMAN RESOURCE MANAGEMENT

Human Resource Management includes an organization's policies, plans, actions, and

systems that impact workforce behaviour and performance. It is a dynamic system as it reacts
to a continuously changing business environment. In today’s competitive era, HR managers
are facing complex challenges such as recession and technology, which influence human
resources. Adapting change is the only way to contribute to the appropriate HR strategy.
Following are some trends organisations are witnessing:
1. Impact of technology: In the present competitive era, technological advancement has
become an essential element to win against rivals in the race of achieving competitive
advantage. Technological advancements have brought a drastic change in
management and operations areas in organisations; also a change in trends in human
resource management, described below:
o Changes in Job specification: With upgradation of technology, the need for
upgraded employee skills, knowledge and aptitude have become necessary.
Employees are required to continue upgrading and modernizing their skill set
and qualification to survive in the organisation. It has also brought a challenge
for recruitment and training departments.
o Attrition and downsizing: Technology has forced organisations to replace
automatic machines with a low level of labours, which has resulted in regular
attrition and downsizing. Organisations also eliminate managerial levels in
hierarchy as mergers and acquisition are carried out by firms to control costs.
o Work from home: Telecommunication and internet facilities have let
employees migrate from office to home. Employees do their work from home
and coordinate via phones, emails, messages and video conferencing.
o Online HRM: Through good internet and intranet, managers are carrying out
various human resource management activities online such as recruitment via
telephonic interview, selection via submission of online assignment, induction
and orientation via video conferencing, collecting employee information
online and performance management.

2. Workforce diversity and Cross-cultural management: It includes the challenge of

managing a workforce which comes from diverse culture and regions. It also includes
meeting the needs and preferences of consumers at a global and international level.
Organisations seek to analyse the similarities and dissimilarities across the cultures
and boundaries in management and organisational behaviour context. Organisations

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.16

adopting cross-cultural management tend to increase the effectiveness in global

management. Workforce diversity is not a less challenging task for managers
nowadays, it includes differences in age, gender, qualification etc. of the workforce.
Organisations have to manage a bunch of heterogeneous employees along with taking
care of their needs and satisfaction. Changing workforce structure in the organisations
has brought new policies and rules in various organisations, which includes:
a. Emphasis on individual employee objectives
b. Equal opportunity for participation
c. Trend of equality, diversity and pluralism
d. Improved quality of work-life
e. Justice and equity for employees

3. Augmented reality: Virtual reality and augmented reality are the latest trends in
human resource management. It is a way of training employees on how to respond to
real-life situations. It is also being adopted in the recruitment and selection process to
let employees experience the real like work-life situation. Candidates are also given a
virtual tour of organisation to understand the organisation culture and work
environment.

4. Blurred international borders: Most of the big organisations, in order to survive

and grow, are moving across global boundaries and expanding their business globally.
When businesses enter international boundaries, HR managers come up with
challenges to deal with foreign company management and staff, to understand
workforce diversity, and they need to grab hold on various languages and cultures.
Mergers and acquisitions have become a new way to expand business globally, which
brings alteration in organisational culture and hierarchy.

5. Digital recognition: Reward and recognition act as a best non-financial motivation to

boost employees’ performance in an organisation. The HRM trend has converted this
motivator from verbal to digital. Digital and online recognition and praises via social
media have led employees to boost their morale to the next level. Peer to peer
recognition on social media platforms is raising employee’s performance scale.

6. Work-life balance: Stress and anxiety among employees are increasing rapidly
because of work pressures, overtime, layoffs, risk of job security, inflation etc. which
affect the overall employee performance. Digitalisation and networking have made
the line of difference between professional life and personal life of employees quite
blurred, as they have to be attentive to emails, report through mobile. It gives extreme
awareness that the importance of work-life balance is essential to retain a healthy
environment, work culture and sustainable workforce. Organisation takes initiatives to
organise workshops and seminars like yoga, career counselling, and other recreational
activities.

7. Strengthened employee engagement: In the current era, employee engagement has

gained importance not just in the field of basic activities but also in decision making,
strategic planning and goal setting. With the growing digital scenario, employees are
offered lots of wellness and stress relieving consultations to ensure optimum
performance and work-life balance. The main focus of organisations, nowadays, is on
retaining potential employees rather than acquiring new and investing cost on training
and development.

Organisation Structure and Human Resource Management

Unit-5: Compensation Management, Industrial Relations and Emerging HR Practices 5.17

8. Human Resource Outsourcing: Outsourcing is the allotment of tasks to outside

parties on a recurring basis, rather than getting it done in house by employees of
organisations. Human resource outsourcing for HR functions has become a common
term in multinational companies. Outsourcing has various advantages like it allows
employees to focus more on core competencies and skills; it also offers strategic
opportunities for HR professionals to enhance their skills, knowledge and efficiency.
It reduces the administrative burdens of organisations and has the advantage of
decreased operating costs. It also helps to get diversity in HR practices.

9. Electronic recruitment and orientation: Recruitment and orientation processes are

shifting to electronic means from paperwork, with easy and time-saving user
interface. Onboarding of new hires will no longer be paper-based. Activities done
through the electronic Human Resource Onboarding process such as electronic forms,
collecting and storing employee’s data electronically, E-verify and Digital Signatures
have made work paperless and quick.

10. Managing with young generation workforce: The young generation is flourishing
at the workplace because of their qualities such as team-orientation, determination,
multitasking, and communication skills etc. In spite of such qualities, young
generation employees need mentoring, career development counselling, and they are
also not easy to tackle. The challenge of HR professionals would be to make existing
employees and young employees work together efficiently.

REVIEW QUESTIONS

1. Explain the objectives and principles of compensation.

2. Discuss the factors influencing compensation.
3. Describe the emerging trends in compensation.
4. Discuss the various methods of payment.
5. Explain the significance of managing industrial relations.
6. Explain the emerging trends and practices in human resource management.

Organisation Structure and Human Resource Management