MMZC 441

Human Resource Management

Chapter 11: Compensation Management
Session 11 Date : By : Dr. Jayashree Mahesh

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Learning Objectives

• Identify the different components of remuneration

• Describe the theories of wage and salary payments
• Identify the variables that influence employee remuneration
• Point out the wage policy of Government
• Explain the wage concepts
• Explain how special groups can be compensated

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Components of Employee Remuneration
Environment

Remuneration

Financial Non-financial

Job Context
Perquisites
Fringe Benefits Challenging job
Company car
Hourly and Monthly PF Responsibilities
Incentives Club membership
rated Gratuity Recognition
Individual plans Paid holidays
Wages Medical Care Growth prospects
Group plans Furnished house
Salaries Accident Relief Supervision
Stock option
Health and Group Insurance, Working conditions
Schemes, etc.
etc. Job sharing, etc.

Direct Indirect

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Theories of Remuneration

• Reinforcement theory
• Expectancy theory
• Equity theory
• Agency theory

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Consequences of Pay Dissatisfaction
Performance

Strikes
Desire for More Pay
Grievances

Absenteeism
Search for Higher Paying
Jobs
Turnover

Pay Dissatisfaction Lower Attractiveness of Job

Psychological
Job Dissatisfaction
Withdrawal

Absenteeism
Visits to the Doctor

Poor Mental Health

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Influencing Factors of Remuneration

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Linkage of Remuneration Strategy to Business Strategy
Business Strategy Market Position and Maturity Remuneration Strategy Blend of Remuneration

High cash with above average

Invest to grow Merging or growth rapidity Stimulate entrepreneurialism incentive for individual
performance. Modest benefits,

Average cash with moderate

Manage earnings-protect incentives on individual, unit, or
Normal growth to maturity Reward management skills
markets corporate performance.
Standard benefits.

Below-average cash with small

Harvest earnings-reinvest
No real growth or decline Stress on cost control incentive tied to cost control.
elsewhere
Standard benefits.

Source: Wayne F. Cascio, Managing Human Resources, McGraw-Hill, 1995, p.352.

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Devising a Compensation Plan
Job Description

Job Evaluation

Job Hierarchy

Pay Survey

Pricing Jobs

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Determining Pay Structures

 Pay level
 Determining Pay Grades
 Salary Band

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Raising Salaries

2003 2004
(Increase in percent)

IT 15 17
ITES 23 25
Telecom (Services) 10 12
Insurance 23 25
Banking (Retail) 12 15
Manufacturing 6 7
Pharma 20 22
Source: Business Today, September 12, 2004. p.46

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Challenges of Compensation

Skill-based Pay

Monetary vs.
Non-Monetary Salary Reviews
Rewards

Employee
Participation
Remuneration Pay Secrecy

Below Market or
Eliticism or
Above Market
Egalitarianism
Rates
Comparable
Worth

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Skill-based Pay and Job-based Pay Compared

Factors Job-based Skill-based

Pay structure Based on job performance Based on ability to perform

Employee carries wage; Employee linked

Employer’s focus Job carries wage; Employee linked to job
to skills.

Employee focus Job promotion to earn greater pay Skill acquisition to earn greater pay.

Advantages Pay based on value of work performed Flexibility; Reduced workforce.

Potential personnel bureaucracy; Potential personnel bureaucracies; Cost

Disadvantages
Inflexibility controls.
Source: Raymond A. Stone, Human Resource Management, John Wiley & Sons, 1995, p.324.

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Concept of Wages

Minimum wage
– provides for sustenance of life but also for preserving efficiency
Fair wage
– comparable with standard wages elsewhere
Living wage
– providing essentials plus certain comforts

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Compensating Special Groups

 Team Based Pay

 Remunerating Professionals
 Contract Employees
 Expatriates and Executives

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 MMZC 441
Human Resource Management
Chapter 12: Incentives and Performance-based Pay
Session 11 Date : By : Dr. Jayashree Mahesh

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Learning Objectives

• Understand incentives in proper perspective

• Identify requisites of an effective system
• Describe the important incentive schemes
• Understand how incentives are applied in Indian industries
• Describe the steps in the introduction of an incentive scheme

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Incentives

 Incentives are variable rewards granted to employees according to the

variations in their performance
 Also called ‘variable pay’ or ‘payment by results’
 Emphasize motivational aspect

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Advantages of Incentives

 Motivation to perform better

 Enhanced employee earnings
 Improve standard of living of employee
 Reduced cost of production
 Increased production capacity
 Reduced supervision, reduced accidents, reduced absenteeism
 Do not affect employers contribution to PF or other retirement benefits
 Case of Bangalore Rail Wheel Factory

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Disadvantages

 Quality is dented
 Introduction of new machines and methods opposed
 Enhanced earnings are taken as regular earnings
 Jealousies creep in
 Difficulty in setting rates
 Difficulty in setting standards
 Ethically incorrect to pay more when normal wages are already paid
 Standards are perceived to be ceilings
 Incentives only remove dissatisfaction but may not offer satisfaction
 Case of Premier Automobiles, Mumbai
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Types of Incentives
Incentive Schemes

Earnings vary in the same Earnings vary less Earnings vary proportionately Earnings differ at different
proportion as output proportionately than output more than output levels of output

Straight Piece Work Halsey Plan High Piece Work Taylor’s Differential Piece
Standard Hour Rowan Plan High Standard Hour Rate
Barth Scheme Merrick Differential Piece
Bedaux Plan Rate
Gantt Task System
Emerson’s Efficiency Plan

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Classification of Plans

Halsey Plan
Rowan Plan Time - Based
Barth Plan
Bedaux Plan

Taylor’s Differential Piece Rate

Merrick Differential Piece Rate
Gantt Task System Output - Based
Emerson’s Efficiency plan

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Halsey Plan

Std Time= 10 Hrs

Rate per hr= Re 1

Case 1 time taken= 10 Hrs

Earnings = 10* 1

Case 2 Time taken = 12 Hrs

earnings = 12* 1

Case 3 Time taken = 8 Hrs

earnings = 8*1
Bonus = ½*2*1 = Rs 1.00
Rs 9.00
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Rowan Plan

Std Time= 10 Hrs

Rate per Hr= Re 1

Case 1 time taken= 10 Hrs

Earnings = 10* 1

Case 2 Time taken = 12 Hrs

earnings = 12* 1

Case 3 Time taken = 8 Hrs

earnings = 8*1
Bonus = 2/10*8 = Rs 1.60
Rs 9.60

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Barth Plan
Std Time= 10 Hrs
Rate per Hr= Re 1
Case 1 time taken= 10 Hrs
Earnings = √ 10 * 10
= 10*1= Rs 10.00
Case 2 Time taken = 12 Hrs
earnings = √12* 10
= 10.95*1 = 10.95
Case 3 Time taken = 8 Hrs
earnings = √ 8*10
= 8.94 * 1 = 8.94

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 Bedaux Plan
Std Time= 10 Hrs
Rate per Hr= Re 1
Case 1 time taken= 12 Hrs
Earnings = 12 * 1
= 12.00
Case 2 Time taken = 8 Hrs
earnings = 8*1
= 8.00
Bonus:
Std Bs = 10*60 = 600
Actual Bs = 8*60 = 480
Bs saved = 120
Bonus 75 * 120*1 = Rs 1.50
100 60
Total earnings = 8+1.50
= Rs 9.50

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Taylor’s Differential Piece-Rate
Standard outputs: 100 Units
Rate per Unit: 10 paise
Differential to be applied:
120% of piece-rate at or above the standards
80% of piece-rate when below the standards
Case 1: Outputs = 120 units
Earnings = 120* 120 * 0.10 = Rs 14.40
100
Case 2: Outputs = 90 units
Earnings = 90* 80* 0.10 = Rs 7.20
100

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 Merrick Differential piece-rate
Straight piece-rates less than 83% of the Std outputs
110% of the base-piece rate for 83%-100% of the Std outputs
120% of the base-piece rate for more than 100% of the Std outputs
Case 1 Output = 80 units
Efficiency = 80 *100 = 80%
100
Earnings: As the efficiency is less than 83%, only the base pie-rate applies: 80*0.10 = 8.00
Case 2 Output = 90 units
Efficiency = 90 *100 = 90%of
100
Earnings: As the efficiency is 83% but less than 100%, 110% the base pie-rate applies:
90* 110*0.10 = 9.90
100
Case 3 Output = 110 units
Efficiency = 110 *100 = 110%
100
Earnings: As the efficiency exceeds 100%, 120% of the base piece-rate applies:
110*120*0.10 = 13.20
100
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Gantt Task System
Rate per Hr =Re 0.50
High piece-rate = Re 0.10
Std Outputs = 80 units
Time taken = 8 Hrs
Std Bonus = 20%

Case 1 Output = 70 units

Earnings : As the output is less than the standard only time wages are paid to the worker
=8*0.50=Rs 4.00
Case 2 Output =80 units
Earnings: As the output is equal to the standard, the worker is entitled to time wage plus 20% bonus
Time wages =8*0.50= Rs 4.00
Bonus =20*4 = Re 0.80
100
Total earnings = Rs 4.80

Case 3 Output =110 units

As the output is more than the Std, the worker is entitled to a high piece rate
10*0.10= Rs 11.00

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 Emerson’s Plan
Up to 67% of efficiency, the workers pay is determined by dividing the time taken by the Std Time-rate
Up to 100% efficiency, 20% bonus is paid to workers
An additional bonus of Rs 1% is added for each additional 1% efficiency
Std output in 10 hrs =100 units Rate Re.1
Case 1 Output in 10 Hrs: 50 units
Efficiency: 50%( below 67%, the worker is eligible for 50% of the time wages only)

Case 2 Output in 10 Hrs : 100 units

Efficiency : 100% (time-wage + 20% bonus)

Case 3 : Output in 10 Hrs : 130 units

Efficiency : 130%
At the rate of 20% at 100% efficiency and 1% increase for every 1% increase in
Efficiency, the worker is eligible for 50% of the time wage as bonus:
Time wag =10*1 Rs 10.00
Bonus =50*10.00 Rs 5.00
100
Rs 15.00
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Incentives Schemes in Indian Industries

• Though incentives are as old as industries themselves, it was only in 1946 that
they were introduced in our country. Even to this day, the incentive schemes
are in their infancy.

• In most industrial establishments, the introduction of incentive schemes has not

been preceded by work studies, consultations with workers’ representatives
and rationalisation of wage structure through job evaluation.

• Incentive schemes differ from industry to industry and from plant to plant within
an industry.

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Incentives Schemes in Indian Industries (contd..)
• Most incentive schemes in operation fall under one or the other of the four
classes mentioned by the ILO. But the schemes are fine-tuned to suit the
requirements of the organisation.
• The schemes in public sector plants have an extremely varied coverage,
some applying only to day-rated employees while others are being made
applicable right up to the top management.
• Inflation has reduced the motivational effect of incentives. Hence, incentives
have to be substantial if workers are to be motivated for higher efficiency and
greater output.
• In many cases, incentives seem to have achieved their objectives, that is
increased productivity and enhanced earnings.

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 MMZC 441
Human Resource Management
Chapter 13: Managing Employee Benefits and Services
Session 11 Date : By : Dr. Jayashree Mahesh

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 Learning Objectives

• Understand the nature of employee benefits and their Importance

• Identify different benefits
• Identify the principles
• Describe the steps in administration
• Identify the problems in administration

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Nature of Benefits and Services

 Employee benefits and services include any benefits that the employee
receives in addition to direct remuneration
 The synonyms used are fringes, service programmes, employee benefits and
hidden payroll
 The word benefit applies to those items which has a direct monetary value to
the employee – pension, medical insurance, holiday pay
 The world service applies to those items for which direct money value for the
individual employee cannot be established – company gym, newspaper

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Importance of Benefits and Services

Indirect Remuneration may

 Mitigate Fatigue
 Discourage Labor unrest
 Satisfy employee objectives
 Aid recruitment
 Reduce Turnover
 Minimize overtime cost
Criteria for Fringe Benefits
 It should be computable in terms of money
 The amount of benefit is not generally predetermined
 No contract indicating when the sum payable, should exist

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Examples of Fringes

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 Types of Non-monetary Rewards
Benefits and Services

Treats Knick-Knacks
• Free lunches Awards
• Desk accessories • Trophies
• Festival bashes Office Environment
• Company watches • Plaques • Redecoration
• Coffee breaks • Tie-pins, brooches • Citations • Office with a window
• Picnics • Diaries/Planners • Certificates • Piped music
• Dinner with boss • Calendars • Scrolls • Flexible hours
• Dinner for the family • Wallets • Letter of appreciation
• Birthday treats • T-shirts

Social Acknowledgement Tokens On the Job

• Informal recognition • Movie tickets • More responsibilities
• Recognition at office get-togetherness • Vacation trips • Job rotation
• Friendly greetings, smiles, e-mail • Coupons redeemable at stores • Special assignments
• Solicitation of advice, suggestions • Early time-offs • Training
• Membership or recreation clubs • Anniversary, dating and birthday • Representing the company at
• Use of company facilities for personal projects allowance/presents public fora

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Important Benefits and Services

Benefits Services
 Social Security  Employee Assistance Programs
 Unemployment Insurance  Child and Elder care
 Pension Plans  Legal Services
 Insurance  Club Membership
 Payment for time not
worked
 Severance Pay

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Administration of Fringe Benefits
Environment

Benefits Strategy

Establish Benefit Objectives

Assess Environmental Factors

Access Competitiveness

Communicate Benefit Information

Control Benefit Costs and

Evaluation

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 Guidelines to Make Benefits More Meaningful

• Fringe benefit programmes should be looked at as a worthwhile corporate

instrument in HRM.
• Future policy planning in this area will have to keep in view some fresh
reference points. Non-unionisation and skills shortage are no more relevant
for policy considerations.
• Any meaningful package of benefits must reflect some perspective planning.
Inflexibility brings stagnation.
• Separate programmes directly beneficial to workers from those that are
directed towards community welfare. Clubbing them together adds to their
cost. This may not be liked by workers.

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 Guidelines (contd..)

• It is advisable not to have a facility rather than neglecting it in its

administration.
• Poor internal communication hurts the programme in at least three ways: (i)
more money is spent for officers’ welfare; (ii) excess money spent on
corporate image building at the cost of more bonus; (iii) priority to officers’
children in admissions to schools. Therefore, make the internal
communication system effective.
• Devise new ways to involve workers and their representatives at all levels of
planning and implementation.

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