5.

COMPENSATION PLANNING

Compensation

Employee remuneration or compensation is the payment an

employee receives in turn for his or her service and
contribution to the organization. His or her standard of living,
status, motivation, loyalty and productivity depends upon the
compensation he/she receives.
For employer too, employee compensation is important
because of its cost of production and to attract and retain
talent.
Therefore for HRM too, employee compensation is a major
function. The HR specialist has a difficult task of fixing wages
and wage differentials to employees and their leaders. A
typical compensation includes both financial and non financial
compensation.

Compensation or Remuneration

According to R. Wayne Mondy, Compensation is

the total of all rewards provided to employees in
return for their services. The overall purposes of
providing compensation are to attract, retain and
motivate employees.

Goals of Compensation Plans

Employers are able to attract and retain
employees who will contribute to the
organizations success
Employees feel they are
compensated/rewarded fairly/equitably for their
efforts and contributions to an organizations
success

Total
Compensation
Employee
Satisfaction

Rewards/Incentive
s.
Bonus
Salary Increases
Promotions
Equity Offerings
Awards
Recognition
New job
assignments

Salary
Pay
Overtime

Benefits
Health Plans
Retirement
Plans
Vacation/ time
off
Paid Training
Working Hours

Steps in compensation management

process

Job Analysis
Job evaluation
Job hierarchy
Compensation survey
Pricing jobs

Financial and Non-financial

Compensation.

Financial compensation is either direct or indirect

Direct compensation consists of wages, salaries, bonuses, or

commissions
Indirect compensation includes all financial rewards not included in
direct compensation, such as insurance, vacation, and childcare
services (benefits)

Non-financial rewards, such as praise, self-esteem, and

recognition, affect employee:

Motivation
Satisfaction
Praise
Recognition

WAGES AND SALARY

SALARY

Salary is a fixed amount of money or compensation paid

to an employee by an employer in return for work
performed. Salary is commonly paid in fixed intervals, for
example, monthly payments of one-twelfth of the annual
salary.
Salary is typically determined by comparing market pay
rates for people performing similar work in similar
industries in the same region. Salary is also determined by
leveling the pay rates and salary ranges established by an
individual employer. Salary is also affected by the number
of people available to perform the specific job in the
employer's employment locale.

Salary: Paid to white collar workers - paid monthly

to employees whose contribution cannot be easily
measured.

WAGE

A wage is monetary compensation

(or remuneration) paid by an employer to an
employee in exchange for work done. Payment may
be calculated as a fixed amount for each task
completed (a task wage or piece rate), or at an
hourly or daily rate, or based on an easily measured
quantity of work done.
Wage: Paid to blue-collar workers - paid daily,
weekly or monthly-paid for the jobs which can , to
some extent, be measured in terms of moneys worth

CLASSIFICATION OF WAGES
CLASSIFICATION OF
WAGES

Minimum wages

Living wage

Fair wage

Real wage

CLASSIFICATION OF WAGES

Minimum Wages: It must provide not

only for the bare sustenance of life but
for the preservation of the efficiency of
the workers by providing some measures
of education, medical care, etc.
Living wages: It is not only for the bare
essentials for the worker and his family,
but also for protection against ill-health,
social needs and insurance for old age.

Fair wages: It is in-between minimum

wages and living wages, but below the
living wage. Fair wage is something
above the minimum wage but below
living wage.
Real wages: the term real wages that
have been adjusted for inflation. Real
wage means that the total amount of
things that this can buy.

Factors affecting wages and salary

Wage policy of the company.

Prevailing wages in the region.
Financial position of the company.
Trade Unions pressure on the
Management.
Relative worth of job done.
Demand and supply of labor.
Economic conditions of the nation.

Methods of wage payment

Piece rate system
In this method of payment you are paid for the
number of pieces or units of work you
complete or sell.
Wages = Number of units produced x Rate of
wage per unit
For example, a worker produces 8 units in one
day and the rate of wages per unit is 10. The
total wages for the day would be: 8 x Rs. 10 =
Rs. 80

Piece Rates
ADVANTAGES:

The faster you work, the more

money you can earn

The supervision costs under

this system are not high,
because the workers are to be
paid on the bases of
performance. The very
attraction of greater reward for
greater effort drives them to
work hard.

You are paid according to your

ability to do the jobs, as the
rewards are better for faster,
more efficient workers

Piece Rates
DISADVANTAGES:

Speed to complete more

work can lead to poor quality
work.
Rates of pay can be set too
low, so the work is regarded
as slave labour and workers
are seen to be exploited
Cost of production may
increase due to more
wastage of materials, high
cost of supervision and
inspection, and wear and
tear of machines.

Time Rates

In this method you are paid for each period

of time you are at work, usually for each
hour.
Wages = Time spent x Wage rate per unit of
time
For example, if a worker gets Rs.10 per
hour, he works for 8 hours per day and has
been present for duty on 25 days during the
month, his wages for the month on the
basis of time rate system will be:
(25 x 8) hours x Rs.10 = Rs. 2,000
Thus the worker is paid on the basis of time
and not on his performance or quantity of
output.

Time Rates
ADVANTAGES:

You are paid for the hours

you are at work even though
you might not be working all
the time

Everyone receives the same

rate for the same job

Overtime rates can be

calculated to compensate for
the loss of your leisure time
if you have to work longer
hours

Time Rates
DISADVANTAGES:

Your employer has to pay

you regardless of the output
you produce

Those able to produce more

may be less motivated to do
so as they get paid the same
rate as those who produce
less

There is little financial

incentive to work hard

Incentive system

Is system that provides additional pay

or bonus( in addition to wages) for
qualitative and quantitative performance
which exceeds standard levels
The main purpose of a good wageincentive plan is to motivate workers to
produce more by allowing them to earn
more.

Perks or Perquisites

Perks are informal word for perquisites which

are privileges granted to employees in addition to
their salaries and benefits (such as medial and pension plans).
'True' perks have little or no cash value or tax implications and
may include company car, reserved parking space, spacious
office, private dining and washroom facilities, etc
Perks are employee benefits, usually in addition to salary and
standard employee benefits. The word, perk or perks, is a short
form of the word perquisite which means incentives which
includes bonuses, extras, or sweeteners.
In use in business, the term perks has come to mean benefits or
extras above and beyond the normal comprehensive benefits
package.

Examples of Perks
The following are examples of perks of both the monetary type and perks
that are available as a privilege.

Company supplied cars

Free lunches or beverages
Company logoed shirts, hats, and other merchandise supplied at low cost
or no-cost
First choice of vacation schedule
First chance to work overtime
Professional association membership
Conference attendance
First chance for lateral moves or promotions
Job openings posted and filled internally before externally
Flexible schedules
Telecommuting opportunities
Office, larger office with window

Fringe benefits
The fringe benefits refer to various extra benefits
provided to employees, in addition to compensation .

Items covered under fringe benefits

entertainment;
festival celebrations;
gifts;
use of club facilities; maintenance of guest house;
conference;
employee welfare

Items covered under fringe benefits

use of health club, sports and similar facilities;

conveyance, tour and travel, including foreign travel
expenses
hotel boarding and lodging;
repair, running and maintenance of motor cars;
repair, running and maintenance of aircraft
consumption of fuel
use of telephone;
For Example: You Could receive a benefit when
you:
For Example: You Could receive a benefit when you
Use a work car for private purposes. Are provided
with a cheap loan. Are provided with cleaning
services for your private residence etc.

Need & Importance of Fringe

Benefits::
To retain the employees.
To motivate performance.
As a social security.
Trade Union demand.
Employee Demand.

BONUS

Abonus paymentis usually made

toemployeesin addition to their base
salary as part of theirwagesorSalary.
APPLICABILITY -The Act applies to- (a)
every factory; and (b) every other
establishment in which twenty or more
persons are employed on any day during an
accounting year.

ELIGIBIITY FOR BONUSE -Every employee

receiving salary or wages up to RS.10,000 p.m.
and engaged in any kind of work whether skilled,
unskilled, managerial, supervisory etc. is entitled
to bonus for every accounting year if he has
worked for at least30 working days in that year.
DISQUALIFICATION FOR BONUS An employee
shall be disqualified from receiving bonus under
this Act, if he is dismissed from service for,-
fraud; or or violent behavior while on the
premises of the establishment; or theft,
misappropriation or sabotage of any property of
the establishment.

MINIMUM AND MAXIMUM BONUS

PAYABLE

The minimum bonus which an employer

is required to pay even if he suffers losses
during the accounting year or there is no
allocable surplus is 8.33 % of the salary
during the accounting year.
The employer should pay bonus in
proportion to the salary or wages earned
by the employee in that accounting year
subject to a maximum of 20% of such
salary or wages.

INCEN TIVES
Incentives or Variable pay.
Incentives are the rewards or payment to an
employee, over and above his base wage or
salary, in recognition of his performance and
contribution. An incentive scheme is a plan
or programmes to motivate individual or group
performance. An incentive programme is most
frequently built on monetary rewards but may
also include a variety of non-monetary
rewards or prizes. By- Burack and Smith

Pre-requirements For Effective Incentive

System:

Incentive plan should be simple so that it may be

easily understood by the workers.
The plans should be acceptable to the workers,
trade unions and management.
The incentives rates should be made attractive so
as to encourage the worker to give his best results.
The scheme should be explained and discussed
with all employees and supervisors before it is
implemented.
Standards once fixed should not be changed
unless it is necessary.

Two Types Of Incentives:

Incentives Financial Incentives

Bonus

Salary Increases

Promotions

Equity Offerings

New job assignments

Non-financial incentives:

Awards

Motivation

Recognition

Appreciation etc

Types of Incentive plans

Group/team
Gain sharing
Group team results
Cost reduction.

Organization
Employee stock
option plan
Profit sharing
Deferred
Compensation(pensio
n, provident fund,
gratuity etc)

COMPENSATION SURVEYS

Organizations have to bridge the gap between the

industry standards and their salary packages. They
cannot provide compensation packages that are
either less than the industry standards or are very
higher than the market rates.
For the purpose they undertake the salary or
compensation survey. The Salary survey is the
research done to analyze the industry standards to
set up the compensation strategy for the
organization.
Organizations can either conduct the survey
themselves or they can purchase the survey
reports from a reputed research organization.

To determine the prevailing rate for a job,

companies can "benchmark" jobs against
compensation surveys that are detailed and
specific to the companies industries and regions.
A good compensation survey uses standard,
proven methods of data gathering and statistical
analysis to determine how much companies pay
for a specific job in a specific industry.
A number of types of organizations conduct
salary surveys, including compensation
information businesses, compensation consulting
firms, industry associations, educational
institutions, and state and federal governments

Objectives of a Compensat
Survey

To gather information regarding the

industry standards
To know more about the market rate i.e.
compensation offered by the competitors
To design a fair compensation system
To design and implement most
competitive reward strategies.

Types of data gathered

Base salaries
Increase percentages or amounts
Salary Ranges
Incentives/Bonuses
Allowances and Benefits
Working Hours
Educational Requirements
Geographic Location
Source of Hire (Internal/External)
Working Conditions Human Resource

Productivity

Productivityis the ratio ofoutputtoinputsin

production; it is an average measure of the
efficiency ofproduction. Efficiency of production
means productions capability to create incomes
which is measured by the formula real output
value minus real input value.

Productivity
Measure of the quantity and quality of work
done, considering the cost of the resources
used.
Measuring performance

How to value the workers contribution

Approaches to Improving Organizational Productivity

41

Pay Structure
Introduction

EMPLOYERS
VIEW
Pay impacts on
employees
attitude and
behavior
Effective
compensation is
significant
organization cost

EMPLOYEES VIEW
Salaries, wages and
other earning
affects their overall
income and thus
standard of living.

Developing Pay Levels

Pay structure - relative pay of different

jobs (job structure) and how much they
are paid (pay level).
Pay level - average pay, including wages,
salaries and bonuses.
Job structure - relative pay of jobs (the
range of pay often expressed by salary
grades).

Two types of employee comparison of

pay, relevant in making pay level and
structure decisions

External Equity pay comparison Focus on

what employee in other organization are
paid for doing the same general job.
Administration tool-market pay survey.
Internal Equity pay comparisons Focus on
what employees within the same
organization, but indifferent jobs are paid.
Job evaluation is the administrative tool.

Performance linked compensation.

A performance-based pay system is a

common method used by organizations to
increase productivity. As companies try to
remain competitive and control costs,
performance-based pay systems are
becoming increasingly popular.
Performance pay attempts to link
compensation to performance.

Reasons to utilize a performance-based

system include:
to retain top performers
to align labor costs with productivity, and
to reinforce company objectives.
A company can base pay on individual or group
output, or company-wide performance. For a
plan to be successful, regardless of its
implementation, employees must:
desire more pay,
believe they will receive more pay if they improve
their performance,
be physically able to improve their performance,
and
trust the company to administer the plan fairly.

Compensation review and restructuring

Compensation conversations can be tricky to
navigate as a manager. They must be addressed
carefully to retain top talent, effectively
mitigating potential turnover costs.
There are two kinds of compensation reviews.
The first is a total package review to make sure
compensation for all positions is in line with
business strategy and competitor pressures.
The second kind is the one that a manager does
with individual employees to determine merit
raises, bonuses, or other incentive awards.

When possible, pay raises should be

based on performance.
Salary disparities between
employeeswho hold the same position
should be justified by performance
ratings.
Simplyproviding a firm- or departmentwide flat percentage raise can backfire.

Thank you Future Managers

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