Compensation planning

Concept:
 Basic returns that an employee obtains from his work
 Receive in exchange for their contribution
 Important function of human resource management
 It is a “glue”
 Package of financial and non financial benefits
 Offered to retain employees
 Acts as motivating factor
 Two main components:
Direct financial and indirect payments
Direct payment consists of: Salaries /wages etc
Indirect payment : Paid leaves, insurance, pension etc

Nature of Compensation:
 Builds an allowance for company profit
 Helps in increasing morale
 Used as reward
 Helps in achieving internal and external equity
 Helps in reducing turnover
Hierarchy of pay levels
Hierarchy of jobs
Set of rules and regulations

Objectives:
•ATTRACT TALENT
•RETAINTALENT
•ESURE EQUITY
•CONTROL COSTS
•COMPLYWITH LEGAL RATES
•EASE OF OPERATION
•ADMINISTRATIVELY EFFICIENT

Types of compensation:
1. Indirect
compensation:
 Protection programs:
 Medical insurance
 Life insurance
 Pension
 Social security

 Pay for time not worked:
 Vacations
 Holidays
 Sick leave
 Services and perquisites
 Recreational facilities
 Car
 Financial planning

2. Direct Compensation
 Base Pay
 Salary
 Wage
 Merit Pay
 Incentive pay
 Bonus
 Profit Sharing
 Shift differential
 Deferred pay
 Saving plans
 Stock Purchase
 Annuity

Wages:
 Wage is monetary compensation or remuneration paid
by an employer to employee
 Regular payment usually hourly or weekly basis
 Paid to blue collar workers
 Paid in cash
Ex: A worker may be paid Rs 100 per day or rs 4500 per
month

Importance of wage system:
 Attract and Retain employees
 Builds high morale
 Satisfied employees
 Labor cost equitable
 No favoritism
 Clearly line drawn of promotion
 Image of progressive employer
 Harmonious industrial relation
 Ensure minimum wages

Factors influencing wage
system:
 Ability to pay
 Supply and demand of labor
 Prevailing market rates
 Cost of living
 Bargaining of trade unions
 Productivity
 Government regulations
 Cost of training
 Psychological and social factors

Various systems of wage
payment:
Time Rate system
Piece Rate system
Work study system
Balance or Debt system
Incentive systems of wage payment

Time Rate system:
 Oldest and most prevalent method
 Employee is paid on weekly, monthly or regular basis
 Non variable method
 Wage=Time spent*Rate per unit of time T*R
 Suppose the worker is paid Rs 10 per hr and he worked
for 15 hours so his wages will be
 15*10=150Rs

Advantages Disadvantages
Simple method Doesn’t differentiate between efficient
and inefficient workers
Sense of security Requires continuous supervision
Maintain quality Slow work
Less wastage Fixed wages
Avoids quarrels among workers No positive inducement

Piece Rate System:
 Workers are paid on the basis of units produced
 Doesn’t considers the time spent by workers
 Known as result by payment or output
 Wage = N*R
Ex: If 2500 units were produced by a worker in 1200 hrs
Rate of production is Rs 3/- per unit so his wages will be
2500*3=7500 Rs

Advantages Disadvantages
Fair to employer and employees Doesn’t help in producing quality
Helps to reduce idle time Workers’ feel insecure in this system
Incentive system Extra supervision cost
Limited supervision Complicated system
Freedom of work to workers Not fair to trainees
Determine the exact labor cost Disturbs unity of workers
Brings cordial relations
Doesn’t help for a uniform flow of
production

Balance method system:
 Combination of time and piece rate system
 Worker is paid fixed wage
 Method ensures the worker the receipt of a fixed amount
as wage in all cases
 Is also known as ‘debt method’

Incentive systems:
 Extra financial reward / motivation
 Performance link reward to improve motivation and
productivity of the employees
 Extra pay for extra performance in addition to regular
wages
 Includes both monetary as well as non monetary benefits
 Not fixed like wages and salaries
 Payment by results

Importance:
 Workers are likely to work at their best when they are
offered monetary rewards for good performance
 It helps to improve work flow, work methods and man
machine relationship
 It helps to bring employee involvement to make
employee innovative
 Incentives are the sound technique of improving
productivity
 It helps to improve discipline and industrial relation
 The cost of supervision is reduced
 It helps in obtaining desired results

Classification of incentive
plans:
 Individual based
 Time based
 Output based
 Organization wide
 Profit Sharing
 Co-partnership
 Gain sharing
 Esop’s
 Group based
 Time based

Types of wages
 Subsistence wage
 Minimum wage
 Fair wage
 Living wage

Wage Fixation:
 Collective Bargaining
 Wage Boards
 Pay commissions

Wage Differentials:
 Differences or disparities in wages
 Wages differ in different employments or occupations
industries and localities and also between persons in the
same employment or grade
 One therefore comes across such terms as occupational
wage differentials, inter industry, inter firm, inter area or
geographical differentials and personal differentials

Various wage plans:
Halsey Plan:
 Time saving bonus plan
 Optional for worker to work on premium plan or not
 Day wages assures whether he earns a premium or not
 Bonus is based on amount of time saved by worker
 Wages are paid on time rate basis
 Combination of day wage and piece wage in modified
firm
Formula=1/2time saved /time taken * daily wage

Advantages:
 Guarantees a fixed time wage to slow workers and at the
same time offers extra pay to efficient workers
 The cost of labor is reduced because of the percentage
premium system, the piece rate of pay gradually
decreases with increased production
 Plan is simple and easy to introduce
 As wages are guaranteed, it does not create any
heartburning among such workers as are unable to reach
the standard
 Workers can earn more by saving time
 Employer gets 50% of time saved

Disadvantage:
 It depends upon past performance instead of making
new standards
 Incentive is not strong as piece rate system
 Employee gets reward for only 50% of the time saved

Rowan plan:
 Time saved is expressed as a percentage of the time
allowed and the hourly rate of pay is increased by that
percentage so that total earnings of the worker are total
number of hours multiplied by increased hourly wages
 Aims at ensuring the permanence of the premium rate
which is often cut by the employer when the worker’s
efficiency increased beyond a certain limit
 The premium is calculated on the basis of the proportion
which the time saved bears to standard time
Formula: Bonus = Time saved/time allowed*Time
taken*Hourly rate

Advantages:
 Time rate is guaranteed
 Workers can earn more by saving time
 Better wage is earned by the employees their
improvement in efficiency is rewarded
 This automatic check enables the worker to earn a fair
wage, because there is less chance of rate cutting by the
employer as he is not paying extra ordinary wages
•Workers can earn more by saving time
•Better wage is earned by the employees their improvement in efficiency is rewarded
•This automatic check enables the worker to earn a fair wage, because there is less chance of rate cutting by the employer as he is not paying extra ordinary wag

Disadvantages:
 Incentive is not strong as piece rate system
 It is difficult to compute than Hasley system
 Sharing principle is not welcomed by employees
 Where time saved is more than 50% of time allowed, the
incentive is lower

Fringe benefits:
Fringe
benefits
helps in
retaining
employees
fosters loyalty
based on
critical job
factors
form of
cash,
goods or
services
benefits over
salary and
above salary

Features of fringe benefits:
Different from regular wages
Employee motivation
Useful but avoidable expenditure
Not directly linked with efforts
Beneficial to all employees

Objectives of Fringe
Benefits:
 To supplement direct remuneration
 To develop good corporate image
 To retain competent employees
 Employers prefer fringe benefits
 To raise employee morale

Advantages:
 Fringe benefits provide support to remuneration paid to employees
 Fringe benefits improve efficiency and productivity of employees
 Fringe benefits reduce monotony and fatigue of employees. They
make employees efficient and co-operative for whatever
organizational changes required to introduced
 Fringe benefits raise morale of the employees. They develop affinity
for the organization
 Fringe benefits develop good corporate image and raise market
standing of the organization
 Fringe benefits act as a motivating force. They motivate employees
and induce them to work for the progress and prosperity of the
organization

Disadvantages:
 May lead to unhealthy competition among employees
 The expected benefit may not be available if the monetary benefits
are not adequately attractive to employees
 The motivation may not be as per expectation if the implementation
of the benefits scheme is not transparent

Types of Fringe Benefits:
Types of Fringe Benefits
Payment for
time not worked
by the employee
Contingent and
deferred
benefits
Legally
required
payments
Miscellaneous
benefits
•Holidays
•Vacations
•Leave with pay
and allowances
•Pension payment
•Group life
insurance benefit
•Sick, leave,
maternity, child
care
•Old age,
disability and
health insurance
•Unemployment
compensation
•Worker’s
compensation
•Travel Allowances
•Company car and
membership of
clubs etc
•Moving expenses
•Child care facilities
•Total expenses
and meal
allowances

Perks:
 Refer to a privilege, benefit or a facility that an employee enjoys in
addition to the regular salary
 Attached to the position of the individual in the company and
typically, higher the designation greater are the perks offered
 For instance the chief executive of a company could enjoy free use of
the company car or a paid membership in a country club as a part of
his perks
 It also include houses, insurances etc
 Perks are things that people want
 Perks are for motivating employees rewarding employees and
fueling business performance
 Moreover business perks are less formal and not contractual rights,
they can also be taken away when situation change- for better or
worse

Types of Perks:
 Taxable for all employees
 Fully exempted
 Taxable for specified employees only

Compensation planning

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Compensation planning