The Importance of HR

Human resource is the most vital resource for any organization . It is responsible for each and every decision taken , each and every work done , and each and every result . Employees should be managed properly and motivated by providing best remuneration and compensation as per the industry standards .

Compensation
Compensation is the remuneration received by an employee in return for his contribution to the organization . It is an organized practice that involves balancing the work employee relation by providing monetary and non- monetary benefits .

Developing a Compensation Strategy

Compensation should not be a result of random decisions Instead , the result of a careful and systematic strategic process . Embedded in the process is an understanding of the basic purposes of compensation An assessment of strategic options for compensation . Knowledge of the determinants of compensation strategy , and the use of pay surveys .

Basic Purposes and Objectives of Compensation

The organization must provide appropriate and equitable rewards to employees . Individuals who work for organizations want to feel valued and . Want to be rewarded at a level commensurate with their skills , abilities and contributions to the organization .

Basic Purposes and Objectives of Compensation

Compensation serves a ( signaling ) function . Organizations signal to employees what they feel is important or the employee to focus on.. (And what they feel is less important )by paying for certain kinds of activities or behaviors and not for others . Compensation can serve as an incentive to employees to increase their efforts along desired lines

Issues of Fairness and Equity

Organizations must consider two different kinds of equity : Internal equity . External equity .

Internal Equity in Compensation

Refers to comparisons made by employees to other employees within the same organization In making these comparisons , the employee is concerned that he is equitably paid for his contributions to the organization relative to the way other employees are paid in the firm . An example and the reaction .

Problems With internal Equity

Can result in conflict among employees , feelings of mistrust , low morale , anger And perhaps even legal actions if the basis of inequity is perceived to result from illegal discrimination .

External Equity
In compensation refers to comparisons made by employees to others employed by different organizations performing similar jobs . Problems with external equity may result in higher turnover ( because employees will leave for better opportunities elsewhere ) .. Dissatisfied and unhappy workers , and difficulties in attracting new employees .

Pay Surveys
Are critical sources of information concerning external equity . Pay surveys are surveys of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group . Some wage surveys especially for executive and managerial jobs, are conducted by professional associations such as the Society for Human Resource Management .

The Importance of Internal and External Equity

Both are important, however, there is one additional consideration concerning internal equity . The Equal Pay Act of 1963 stipulates that men and women who perform essentially the same job must be paid the same .

Problems Related to Internal Equity

Generally speaking, internal equity problems occur when employees on one job feel that they are being undercompensated relative to employees on some other job or jobs within the organization . However, it is illegal to pay a woman less than a man(or vice versa ) for performing the same job when no objective bases for such a difference exists.

Motivational purpose
It is important that compensation serve a motivational purpose. Meaning that individuals should perceive that their efforts and contributions to the organization are recognized and rewarded. Individuals who work hard and who perform at a high level should be compensated at a level higher than are individuals who do just enough to get by or at below average rate .

Compensation Management
Is more than just the means to attract and retain talented employees . In todays competitive labor market , organizations need to fully leverage their human capital to sustain a competitive position . This requires integrating employee processes , information and programs with organizational processes and strategies to achieve optimal organizational results .

Compensation Plans
Successful Organizations are committed to the continued success of their Compensation Plan Such a plan enhances the organizations ability to staff core operations and new initiatives

Compensation Plans
Support employee development , recruit and retain highly qualified employees and Reward them based on heir performance and capabilities and support . The achievement of organizational goals

Compensation
Is an integral part of human resource management which helps in Motivating the employees and improving organizational effectiveness . If the compensation offered is effectively managed , it contributes to high organizational productivity .

Need of Compensation Management

A good compensation package is important to motivate the employees to increase the organizational productivity . The lucrative compensation will also serve the need for attracting and retaining the best employees .

Need of Compensation Management

Unless compensation is provided no one will come and work for the organization . Thus , compensation helps in running an organization effectively and accomplishing its goals .

Need of Compensation Management

Salary is just a part of the compensation system . The employees have other psychological and self actualization needs to fulfill , thus , compensations serves the purpose . The most competitive compensation will help the organization to attract and sustain the best talented employees

Need of Compensation Management

motivation

compensation

Employee retention

Need satisfaction

Designing The Compensation System

Compensation systems are designed keeping in minds the strategic goals and business objectives . They are designed on the bases of certain factors after analyzing the job work and responsibilities .

Components Of Compensation Systems

Job analysis

Pay structure

Salary scales

Types of Compensation
Compensation can be direct in the form of monetary benefits and / or in th form of non monetary benefits known as perks , time off , etc. It does not include only salary ,but it is the sum total of all rewards and allowances provided to the employees in return for their services .

Types of Compensation
There are two different types of compensation management : direct and indirect . Compensation is the combination of monetary and other benefits provided to an employee in return for his time and skill . The field of compensation management provides management with the ideal combination of the different remuneration types .

Direct Compensation
Is typically comprised of salary payments and health benefits . The creation of salary ranges and pay scales for different positions within the company are the central responsibility of compensation management staff .

Medical reimbursement Special allowances

Basic salary

House rent allowances

Direct compensation

Bonus

Conveyance

Leave travel allowances

Indirect Compensation
Refers to non monetary benefits offered and provided to employees in lieu of the services provided by them to the organization . They include Leave policy , Overtime policy , Car policy , Hospitalization , Insurance , Leave travel , Assistance Limits , retirement benefits , Holiday Homes .

Overtime policy

Leave policy

Hospitalization

Flexible Timings

Indirect Compensation

Insurance

Holiday Homes Retirement Benefits

Leave travel

Direct Compensation:Basic Salary

Is the amount received by the employee in lieu of the work done by him for a certain period , say , a day , week , month .

Direct Compensation : House Rent Allowance

Organizations either provide accommodation to their employees or they provide house rent allowances . This is done by to provide them social security and motivate them to work .

Direct Compensation: Conveyance

Organizations provide for cab facilities to their employees . Few organizations also provide vehicles and petrol allowances to their employees to motivate them .

Direct Compensation : Leave Travel Allowances

Are provided to retain the best talented employees 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 .

Direct Compensation : Medical Reimbursement

Organizations also look after the health conditions of their employees

Pay and performance

The development of performance related pay schemes that are related to assessments of performance through individual employee appraisal . This is widely thought, but hard to actually achieve .

Problems with pay for performance

One primary problem is defining performance properly, so that the organization pays for results and not for effort .

The basis of performance related pay systems

It seems only fair that people should be paid according to their contribution . Performance related pay schemes can benefit both employers and employees by emphasizing the importance of efficiency and effective job performance, employers can benefit from higher productivity . Higher pay can be targeted at the ( better ) performance encouraging them to stay with the company and continue to perform to a high standard .

Wages versus salaries

Fundamental to understanding compensation is the distinction between wages and salaries . Wages generally refer to hourly compensation paid to operating employees; the basis for wages is time . That is, the organization pays individuals for specific blocks of their time . Most organizations calculate wages on an hourly basis .

salary
Is income paid to an individual on the basis of performance, not on the basis of time . A salary is used to provide compensation not for how much time people spend in the organization but for their overall contribution to the organizations performance .

Strategic Options for Compensation

Most organizations establish a formal compensation strategy that dictates how they will pay individuals . Several decisions are embedded within this strategy, the first decision relates to the basis for pay . Most organizations traditionally based pay on the functions performed on the job .

Strategic Options for Compensation

More recently, organizations have begun to rely on skill-based pay and pay- forknowledge programs . In this way, organizations signal to their employees the relative importance of what someone does on the job versus what they bring to the job .

Strategic Options for Compensation

A second decision in developing a compensation strategy focuses on the bases for differential pay within a specific job . In some organizations, especially those with a strong union presence, differences in actual pay rates are based on seniority, that is.. With each year of service in a particular job, wages go up by a specific amount, so the longer one works on the job, the more the person makes

Maturity Curve
Is a schedule specifying the amount of annual increase a person will receive . This curve is used when the annual increase varies based on the actual number of service the person has accumulated . The assumption under a seniority based system is that employees with more experience can make a more valuable contribution to the organization and should be rewarded for that contribution .

Strategic Options for Compensation

A third decision in developing a compensation strategy deals with the organizations pay rates relative to going rates in the market . In addition to attracting high-quality employees, market rates system tends to minimize voluntary turnover among employees .

Determinants of Compensation Strategy

One general set of factors has to do with The overall strategy of the organization itself. A firm in a high-growth mode is constantly striving to attract new employees and may find itself in a position of having to pay above-market rates to do so . The organizations ability to pay is an important consideration, those with healthy cash flow and / or substantial cash reserves are more likely to be able to pay above market wages and salaries .

Determinants of Compensation Strategy

In addition , the overall ability of the organization to attract and retain employees is a critical factor . If the organization is located in an attractive area; has several non compensation amenities; and provides a comfortable pleasant and secure work environment, then it might be able to pay somewhat lower wages and vice versa.

Determinants of Compensation Strategy

Union influences comprise another important determinant of an organizations compensation strategy .. If an organization competes in an environment that is heavily unionized, then the strength and bargaining capabilities of the union influence what the union pays its employees

Determining what to pay

Once a compensation strategy has been chosen, it is necessary to determine exactly what employees on a given job should be paid. The starting point in this effort has traditionally been job evaluation.

Job evaluation methods

Is a method for determining the relative value or worth of a job to the organization so that individuals who perform this can be compensated adequately and appropriately. Job evaluation is mostly concerned with establishing internal pay equity. Several job evaluation techniques and methods have been established.

Wage and Salary Administration

Once wages and salaries have been determined, the resulting compensation system must be administered on an ongoing basis . Most organizations call this process wage and salary administration . It is an ongoing process of managing a wage and salary structure .

Wage and Salary Administration

Much of this administration involves making adjustments to wages and salaries as the result of pay raises or changes in job responsibilities . In organizations where jobs are arranged in a more hierarchical structure, it is important to implement programs for progression to a higher level job within a job class ..

Wage and Salary Administration

In addition, there are certain issues that are related to compensation that must also be addressed as part of this administration process Two of the most important of these issues involve pay secrecy and pay compression .

Pay Secrecy
Refers to the extent to which the compensation of any individual in an organization is secret .. Or the extent to which it is formally made available to other individuals. Each approach has some merit .

Advocates of Pay Secrecy

Maintain that what an individual is paid is his own business and is not for public knowledge . They also argue that if pay levels are made known to everybody else, then jealousy and/ or resentment will result . Most business practice pay secrecy, sometimes to the point of formally forbidding managers from discussing their pay with other people .

Open Pay System

Some organizations adopt a more open pay system where everyone knows what everyone else makes . The logic behind this strategy is that it promotes equity and motivation .

Open Pay System

If high performers are known to make more money than low performers. It follows logically that people throughout the organization will be motivated to work harder, under the assumption that . They too will be recognized and rewarded for their contribution .

Open Pay System

Many publicly funded organizations such as state universities and public schools have open pay systems whereby . Any interested individual can look at budgets or any other information to determine how much any employee is being paid .

Open Pay System

Pay secrecy is a long- standing practice in many companies today . But some companies seem to be willing to consider open pay systems . At the same time, however, organizations that are interested in open pay systems should be prepared for cries of favoritism, politics, and worse!

Open Pay System

Workers who are paid less than they think they deserve will likely find reasons To criticize the pay of others, especially upperlevel managers whose salaries are likely to be relatively high .

Pay Compression
Is another problem that some organizations must confront occasionally during wage and salary administration . It occurs when individuals with substantially different levels of experience and/or performance abilities are being paid wages or salaries that are relatively equal .

Pay Compression
Is most likely to develop when the market rate for starting salaries increase at a rate .. Faster than an organization can raise pay for individuals who are already on the payroll .

Pay Compression
It may be possible for a newcomer starting in organization to be paid a higher salary than an individual who has been working for the organization for a year or two . If other employees are aware of this situation, then again the possibility for resentment and disappointment is likely to increase .

Pay Compression
Organizations sometimes have little remedy in the event of pay compression , they have to respond to market shifts .