Compensation

A Concept
By DR DP Sahoo
Compensation (meaning) - Compensation is a "If you pick the right
systematic approach to providing monetary people and give them
value to employees in exchange for work the opportunity to
performed. spread their wings -
and put compensation
and rewards as a
carrier behind it - you
almost don't have to
manage them." -Jack
Welch

Compensation may be used to:

•Recruit and retain qualified employees.
•Increase or maintain morale/satisfaction.
•Reward and encourage peak performance.
•Achieve internal and external equity.
•Reduce turnover and encourage company loyalty.
•Modify (through negotiations) practices of unions.
Objectives of Compensation systems:

1. Adequacy:
2. Equitable
3. Balanced
4. Cost efficient
5. Secure & consistency
6. Incentive provider
7. Acceptability ( to Employees & Management)
 Compensation
Compensation Considerations
System design Decisions
Strategy And Activities
concept

Hire External Salary & •Pay Level

employees Equity Benefits •Pay Structure
Bench •Benefit Level
marking •Benefit Structure
Retain internal
Compensation
employees Equity
Goals Internal
Benefits
Bench
marking* •Job Content
Motivate Employee •Job Structure
employees Equity

Relative
worth of the
employee**
•Mix of Pay
Adjustments

Internal Labour External Labour

Org Strategy Economy Legislation Unions
Market Market
Constraints
*In the form of : Job Analysis, Job Evaluation, Job Description.
** Merit Pay, Bonus Pay, Incentive Pay, Fringe benefits, Performance linked pay etc.
What is compensation? Money being the
most critical
incentive, at
works,
compensation is
important both for
Compensation is the remuneration employees and
received by an employee in employers.
return for his/her contribution to the
organization.
It is an organized practice that involves
balancing the
work-employee relation by providing
monetary and
non-monetary benefits to employees.
Compensation is an integral part of human
resource management
which helps in motivating the employees
and improving organizational
effectiveness.
Need for compensation Management

•A good compensation package motivates the

employees to increase the organizational productivity.
•Compensation helps in running an organization
effectively and accomplishing its goals.
•Salary is just a part of the compensation system,
the employees have other psychological and self-
actualization needs to fulfill. Thus, compensation
serves the purpose.
•The most competitive compensation will help the
organization to attract and sustain the best talent.
The compensation package should be as per industry
standards.
Types of Compensation
Compensation provided to employees can be
direct in the form of monetary benefits and/or
indirect in the form of non-monetary benefits
known as perks, time off, etc.

Direct compensation refers to monetary

benefits offered and provided to employees in They are given at
return of the services they provide to the a regular interval
organization. The monetary benefits include at a definite
basic salary, house rent allowance, time.
conveyance, leave travel allowance, medical
reimbursements, special allowances, bonus,
Pf/Gratuity, etc.
Direct compensation
Basic Salary HRA: Organizations either provide
Basic Salary is the amount received by accommodations to its employees who are
the employee in lieu of the work done from different state or country or they provide
by him/her for a certain period say a house rent allowances to its employees. This is
day, a week, a month, etc done to provide them social security and
motivate them to work.
Conveyance
Organizations provide for cab Medical Reimbursement
facilities to their employees. The employees are provided with medi-claims
for them and their family members. These
Leave Travel Allowance medi-claims include health-insurances and
The employees are given allowances to treatment bills reimbursements.
visit any place they wish with their
families. The allowances are scaled as per Bonus
the position of employee in the Bonus is paid to the
organization. employees during festive
seasons to motivate them and
Special Allowance provide them the social
Special allowance such as overtime, mobile allowances, security.
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.
Indirect Compensations
A sound compensation policy
1. Organizations encourages clear-cut plan to determine
different pay level on the basis of :
a. Skill levels,
b. efforts & responsibilities,
c. working condition,
d. Length of service,
e. Qualifications.
f. Past performance,
g. Length of service in the organization etc.
2. Equate salaries in the industry, market trend etc.
3. Pay for job performed not for person involved.
4. Distinguish people from Job.
5. Equitable measures to avoid individual difference.
6. Introduction of wages grievance mechanism.
7. Transparency and communication with employees and
the associations on the factors determining the wages structure.
Advantages of Fair Compensation System:
Therefore a fair compensation system is a must for every business organization. The fair
compensation system will help in the following:
1.If an ideal compensation system is designed, it will have positive impact on the efficiency
and results produced by workmen.
2.Such system will encourage the normal worker to perform better and achieve the standards
fixed.
3.this system will encourage the process of job evaluation. It will also help in setting up an
ideal job evaluation, which will have transparency, and the standards fixing would be more
realistic and achievable.
4.Such a system would be well defined and uniform. It will be apply to all the levels of the
organization as a general system.
5.The system would be simple and flexible so that every worker/recipient would be able to
compute his own compensation receivable.
6.Such system would be easy to implement, so that it would not penalize the workers for the
reasons beyond their control and would not result in exploitation of workers.
7.It will raise the morale, efficiency and cooperation among the workers. It, being just and fair
would provide satisfaction to the workers.
8.Such system would help management in complying with the various labor acts.
9.Such system would also bring about amicable settlement of disputes between the
workmen union and management.
10.The system would embody itself the principle of equal work equal wages. Encouragement
for those who perform better and opportunities for those who wish to excel.
Difference between Compensation & Rewards

Forms of Control Theoretical Terms

Coercive / Threat Punishment
Remuneration Compensation
Motivate , Encourage, Reards
Recognize

Why Rewards?
Explain the concept
The impact of the law of diminishing returns from the additional
the help of ‘Maslow’s
earnings (on the marginal income).
model of need
hierarchy ‘
& ‘Vroom’s
Non- financial rewards strengthen the Psychological contacts
expectancy
between Employer & Employee.
theory’
Rewards in terms of Maslow’s theory
Work Motivation Model By Smith & Cranny
Rewards
Work motivation is the
result of interaction of
three main variables
i.e. Efforts, Satisfactions
& Rewards.

Performance

Effort or intention Satisfaction

Performance will lead to rewards is a pre conditions.

Impact of rewards systems:

-Rewards motivates learning skills

-Rewards motivates for knowledge
-Rewards motivates for new initiatives
-Rewards motivates ‘thinking out of the box’
-Rewards motivates for higher performance.
-Rewards motivates for cost compression.
The following are some of the tasks of a Compensation and
Benefits manager:

• Identify and put into service an attractive pay package which is capable of
retaining the existing talent within the entity.
•Bench mark salaries with competitors to guarantee that the compensation and
benefit package offered is equivalent to those existent in the market.
• Researching and scrutinising the general factors like the government policies,
change in the tax structure, market conditions, etc to ensure that the
compensation package is capable of providing an expected standard of living to
the employees
• Pains must be taken to make modifications to the existing pay and
compensation structure every annum after taking into account the employee
performance, company policies, Government regulations, Labour laws,
statutory laws like the Income Tax amendments, competitive rates, etc.
• He should modify the pay structure on the basis of the employee performance
appraisals to bring a heterogeneous structure as a move to retain key movers
and shakers.
The following are some of the tasks of a Compensation and
Benefits manager:
• A compensation and benefits manager is responsible for the identification,
implementation and modifications to the employee benefit schemes like health
and life insurance of the employees and their family members, pension schemes,
medical reimbursement programs, etc taking into account the actual cost that
might be incurred by the employee. Other compensation measures like bonuses,
profit sharing, etc must move in line with the changes in the pay structure and
other external and internal factors.
• The manager must conduct surveys to discover the expectations of the
employees regarding the various compensation schemes, compare them with the
current policies and propose modifications on the basis of the surveys and their
impact on the cost to the company.
• He is to provide cost analysis to the management to aid them in bargaining to
the proposals put forth by the labour unions.
• The compensation and the benefits manager is to provide the payroll related
data after taking into consideration the proposed modifications for budgeting.
• With the number of mergers and acquisitions being on the rise, the integration
of the schemes of the two companies into a viable solution supported by the
employees of both the companies requires the knowledge and skill of the expert.