COMPENSATION

Compensation Administration – is a segment of management or human resource

management focusing on planning organizing and controlling the direct and indirect
payments employees receive for the work they perform.

HISTORY

Rudimentary pay management has existed for as long as there have been employers and
employees. Owners of typically small, preindustrial businesses commonly weighed their
ability to pay against employee responsibilities and contributions in order to determine
compensation. The rapid development of corporations, multiplication of administrative
hierarchies, and specification of jobs in the 20th century removed owners from the day-to-day
evaluation of jobs. Unionization brought a brought a measure of standardization to wage
labor, but neither the private sector nor the federal government began to study systematic job
evaluation until after World War 1. The federal government spearheaded the development of
formal compensation administration with the passage of the Federal Classification Act of
1923, which ranked government jobs and set salary levels accordingly.

Milton L. Rock and Lance A. Berger, authors of The Compensation Handbook, credited
human resource professional Edward N. Hay with providing a foundation for 20th-century
compensation management. Hay began his work in the late 1930s, when his employer, a
bank, asked him to create a system of pay without ethics, racial, or gender biases. He
embarked on the assignment by analysing jobs – their duties, responsibilities, skill, education
levels etc. – and composing descriptions based on his findings. Hay operated on the theory
that “something that can be measured has value has something that can’t be measured has
none.” Accordingly, this pioneer devised guide chart that systematically evaluated and rank
jobs according to several variables: know-how, accountability, working condition, physical
effort, and problem solving. The guide charts that bore his name would become the world’s
single most widely used job evaluation technique. By 1943, when Hay founded his
trendsetting consulting practice, organisation throughout the United States (including the
federal government) has acknowledged the need for a consistent salary-administration system
that would facilitate job evaluation, ranking, and pricing.

During the period between the world wars, the American Management Association began to
compiles descriptions of non-union (especially clerical and blue-collar) jobs. Beginning in the
mid-1930s, the federal government’s Employment Service enlisted its field offices
throughout the country to describe and codify jobs. The first edition of the resulting
Dictionary of Occupational Titles (DOT), published in 1939, contained about 17,500
summary definitions presented alphabetically by title. Blocks of jobs were assigned five-or
six-digit codes that classified them in one 550 occupational groups and indicated whether the
positions were skilled, semiskilled, or unskilled. This erratically published compendium
became the "bible" of the emerging compensation profession. It provided a foundation for
systematic pay plans by promoting internal classifications of jobs and later, external
comparisons of jobs across industries.

Mobilization of the domestic economy for World War II significantly advanced the
compensation discipline, both directly and indirectly. The war's technological advances
helped add 3,500 new occupations in the plastics, paper and pulp, and radio manufacturing
industries to the economy, and to the second edition of the Dictionary of Occupational Titles.
The war era also saw the imposition of governmental wage and price controls and guidelines.
During the "freeze," only companies with rational job evaluation plans could justify upward
pay and benefit adjustments. This requirement helped coerce some recalcitrant corporations
into formulating systematic pay plans. Since the controls on wages were more stringent than
those on benefits, labor unions lobbied for increased benefits and employers gladly
capitulated. At the time, generous packages of benefits were non-taxable and cost-effective
for employers. Now-common benefits such as pension plans, supplementary
unemployment, extended vacations, and guaranteed wages were added to the roster of
statutory benefits that had included Social Security (federal), workers' compensation, and
unemployment compensation. Over the years, aggressive unions negotiated an astonishing
array of benefits, the administration of which fell to compensation managers.

Most companies limited their pay analysis efforts internally until after the war. During the
1950s, Hay and other human resource professionals joined the federal government in broader
examinations of compensation. The introduction of computers quickly and continuously
simplified and advanced the data collection, quantification, and storage processes. The
resulting databases have enabled survey analysts to thoroughly study relationships within and
among corporations, industries, and geographic regions.

The profession grew so systematized, in fact, that its precepts were considered nearly as
inviolate as natural law until the early 1990s. At that time, corporate downsizing,
international competition, and new management schemes compelled compensation
managers to be more adaptive to the changing needs of employers and employees. These
shifts went to the heart of wage and salary administration: job descriptions. As companies
asked their employees to use their competencies and skills to contribute to results in several
ways, rather than just one easily described way, the compensation administrator’s tasks of job
description and comparison have grown more difficult and variable. One observer of these
changes has characterized compensation managers in this environment as "engineers" who
apply established techniques as situationally warranted. The basics of the discipline still
apply, but they are adapted to each corporate culture.

Basic Component of Compensation Programs

Four Components
1. Base pay
2. Wage and salary add-ons
3. Incentive payment
4. Benefits and service

Base pay refers to the cash that an employer pays for the work performed. This base pay can
be further delineated as either a wage or a salary. Wage are hourly rates of pay regularly by
the Fair Labor Standards Act of 1938.

Wage and salary add-ons include cost-of-living adjustments (or COLAs), overtime, holiday
and other premium wages, travel and apparel expenses, and a host of related forms of
premiums and reimbursements. Wage and salary add-ons are used to compensate employees
for work above and beyond their normal work schedules or to reimburse them for expenses
related to their jobs. COLAS are usually across-the-board contractual increases tied to an
economic indicator, such as the consumer price index, that reports an increase in the cost of
living.
Incentive payments refer to funds employees receive for meeting performance or output
goals as well as to seniority and merit pay. Companies provide these forms of compensation
to influence employee behavior, improve productivity, and reward employees for their years
of service or their strong job performance.

Benefits and services include paid time off, health insurance, deferred income such as
pension and profit sharing programs, company cars, fitness club memberships, child care
services, and tuition reimbursement.

Definition of Compensation
Compensation is a substitute word of wages and salaries and it has recently originated.

According to Cascio (1995) the Compensation includes direct cash payments and indirect
payments in form of employees’ benefits and incentives to motivate employees to strive for
higher levels of productivity.

According to Milkovitch and Newman (2005) the Compensation is all forms of financial
returns, tangible services and benefits employees receive as part of an employment
relationship. The phrase “financial returns” refers to an individual’s base salary, as well as
short- and long-term incentives.

Tangible services and benefits:

 Insurance
 Paid vacation
 Sick days
 Pension plans
 Employee discounts

Compensation Management
 Compensation is the remuneration received by an employee in return of their
contribution to the organization.
 The compensation management is an organized practice which is important for
balancing the work and employee relationship providing monetary and non-monetary
compensation to employees.
 Compensation includes all from of pay given to the employees which arise from the
employment. The one of the strapping feature of the organization is compensation
management and they used it to attract and retain the most important and worthy
assets.

Compensation management is considers is considered to be a complex process which requires

accuracy and precision and if not carried out properly may lead to employees’ dissatisfaction.
It also helps the organization to set the standards for job that it is related, realistic and
measurable. Compensation policies should have a sound integration with practice of HRM.
One of the key functions of compensation management of any company is to create a hearty
competition among the employees in order to attain more efficiently and provide growth
opportunities to its employees.
Objective of Compensation

Bhattacharay (2009)
Objective of compensation or wages
 Equity
 Efficiency
 Macro-economic Satiability
 Efficient Allocation of Labor
 Motivation the Employees
 Acquired Qualification
 Retain Current Employees
 Reward Desired Behavior
 Control Cost
 Comply with Legal Regulations
 Facilitate Understanding
 Further Administrative Efficiency

Principle of Compensation Formulation

Seven principle of compensation formulation

i. The organization should have an unambiguous plan to determine differential pay

levels in terms of different job requirements involving varied skills, exertion,
responsibility and working conditions.
ii. An attempt should be made to keep the common level of wages and salaries of the
organization in line with that obtained in the labor market.
iii. Adequate attention should be taken to distinguish people from the jobs. Although
people are paid in terms of rate embodied in specific jobs, some exceptions should be
allowed in the cases of professional and executive personnel by paying them in terms
of their abilities and contributions.
iv. The care should be taken irrespective of individual considerations to ensure that equal
pay for equal work.
v. There should be a plan to adapt an unbiased measure for identifying individual
differences in capacity and contribution in the form of rate ranges with in the grade
increments, wages incentive schemes and a system of job promotion.
vi. There should be proper procedure for handling the wage grievances in organization.
vii. Adequate care should be taken to inform the employees and the union, if any, about
the procedure followed in determining wage rates. There were no confidential wages
and the employees should have a clear understanding of their wage or salary structure.
This will enhance employee satisfaction with wages. There are certain guiding
principles which provide the foundation for effective reward management.