COMPENSATION

Important Terms
Wage :Compensation consisting of Basic Wage +Allowances Salary :Compensation paid to indirect labour on time rate basis Minimum wages :Fixed by Government on the basis of cost of living Fair wages :Above the Minimum wage but below the Living wage

Important Terms
Living wage :Basic requirement of Roti,Kapada aur Makhan + other welfare and safety measures (insurance ) Take Home Pay :Gross Salary -----Deductions -----Take Home Salary____ CTC (cost to the company)

Compensation: An Overview
Compensation - Total of all rewards provided to employees in return for their services Direct financial compensation - Pay that a person receives in the form of wages, salaries, bonuses, and commissions Indirect financial compensation - All financial rewards that are not included in direct compensation

Equity in Financial Compensation

Equity - Fair pay treatment for employees External equity - Firm's employees are paid comparably to workers who perform similar jobs in other firms. (Salary Surveys) Internal equity - Exists when employees are paid according to the relative value of their jobs within the same organization. (Job Analysis & Job Evaluation)

Equity in Financial Compensation (Continued)

Employee equity - Individuals performing similar jobs for the same firm are paid according to factors unique to the employee, such as performance level or seniority. (Performance Appraisal & Incentives) Team equity - More productive teams are rewarded more than less productive groups. (Team Appraisal)

Corporate Policies, Competitive Strategy, and Compensation

Aligned Reward Strategy

The employers basic task:
To create a bundle of rewardsa total reward packagethat specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.

The HR or compensation manager along with top management creates pay policies that are consistent with the firms strategic aims.

Objectives of Compensation
ARM Control of Cost Collective Bargaining Competitiveness Recognition of Merit and Effort Tax considerations Government compliance Ensuring equity

Compensation Policy Issues

Pay leaders / Market rate / Pay followers

Pay for performance

Pay for seniority Salary increases and promotions

Overtime and shift pay

Probationary pay Paid and unpaid leaves

Paid holidays
Geographic costs of living differences Expatriate compensation

Factors affecting Wage and Salary External Factors:

Government Legislations/Regulations

Market Rate
Labour supply and demand Cost of Living Labour Unions Economy

Globalization
Collective Bargaining Technology

Factors affecting Wage and Salary

Internal Factors: Ability to pay Job Evaluation & PA The Employee Age, Qualifications, Promotions, Hazards involved in the job, Industry involved in the job

 Government Legislations
Payment of Wages Act,1936

Minimum Wages Act, 1948

Minimum wages to certain sweated and unorganized sectors covered in the act. Can be fixed by hour, day, month or any other longer period. Subjected to be revised every 5 years.

Equal Remuneration Act,1976

No gender based discrimination in Recruitment,Training,Promotion and Compensation unless the Law explicitly prohibits employment of women

Job Evaluation
Firm determines the relative value of one job in relation to another Compensable factor
A fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions.

Compensable factors
Skills

Effort Identifying Compensable Factors Responsibility

Working Conditions

Sample Definitions of Five Factors Typically Used in Factor Comparison Method

1. Mental Requirements Either the possession of and/or the active application of the following: A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression, ability to get along with people, and imagination. B. (acquired) General education, such as grammar and arithmetic; or general information as to sports, world events, etc. C. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc. 2. Skill Requirements A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful coordinations, dexterity, assembling, sorting, etc. B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by performance of the work and not to be confused with general education or specialized knowledge. It is very largely training in the interpretation of sensory impressions.

Examples
1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill. 2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill. 3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be shoveled over the surface would be skill. 3. Physical Requirements A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount exercised and the degree of the continuity should be taken into account. B. Physical status, such as age, height, weight, sex, strength, and eyesight.

Sample Definitions of Five Factors

4. Responsibilities A. For raw materials, processed materials, tools, equipment, and property. B. For money or negotiable securities. C. For profits or loss, savings or methods improvement. D. For public contact. E. For records. F. For supervision. 1. Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary feature. Planning, direction, coordination, instruction, control, and approval characterize this kind of supervision. 2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates, but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A in the supervision factor. To summarize the four degrees of supervision: Highest degreegives muchgets little High degreegives muchgets much Low degreegives nonegets little Lowest degreegives nonegets much 5. Working Conditions A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion, fellow workers, etc. B. Hazardsfrom the work or its surroundings. C. Hours.

Ranking Method
Simplest method Raters examine description of each job Jobs arranged in order according to value Must first conduct job analysis and write job description

Job Classification
Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.
Classes contain similar jobs. Grades are jobs that are similar in difficulty but otherwise different. Jobs are classed by the amount or level of compensable factors they contain.

Point Method
A quantitative technique that involves:
Identifying the degree to which each compensable factors are present in the job. Awarding points for each degree of each factor. Calculating a total point value for the job by adding up the corresponding points for each factor.

Example of One Factor (Complexity/Problem Solving) in a Point Factor System

Evaluation Points Assigned to Factors and Degrees

Factor Comparison Method

Each job is ranked several timesonce for each of several compensable factors. The rankings for each job are combined into an overall numerical rating for the job

Ranking Key Jobs by Factors1

Ranking Key Jobs by Wage Rates1

Performance-Based Pay
Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal Variable pay - Compensation based on performance Skill-based pay - System that compensates employees on the basis of job-related skills and knowledge they possess Competency-based pay - Compensation plan that rewards employees for their demonstrated expertise

Competency-Based Pay
Competencies
Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

What is Competency-Based Pay?

Paying for the employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds.

Competency-Based Pay (contd)

Why Use CompetencyBased Pay?

Support HighPerformance Work Systems

Support Strategic Aims

Support Performance Management

Competency-Based Pay in Practice

Main elements of skill/competency/knowledgebased pay programs:
1. A system that defines specific skills, and a process for tying the persons pay to his or her skill. 2. A training system that lets employees seek and acquire skills.

3. A work design that lets employees move among jobs to permit work assignment flexibility.

Competency-Based Pay: Pros and Cons

Pros Higher quality Lower absenteeism Fewer accidents Cons Pay program implementation problems Costs of paying for unused knowledge, skills, and behaviors Complexity of program Uncertainty that the program improves productivity

Other Compensation Trends

Broad banding
Consolidating salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels.

Pro and Cons

More flexibility in assigning workers to different job grades. Provides support for flatter hierarchies and teams.

Promotes skills learning and mobility.

Lack of permanence in job responsibilities can be unsettling to new employees.

Motivation, Performance, and Pay

Incentives
Financial rewards paid to workers whose production exceeds a predetermined standard.

Organization wide Incentives

Profit sharing Gain sharing ESOP INDIVIDUAL INCENTIVES
Piece rate Lumpsum merit pay Commissions

Job Pricing
Placing a Rupee value on the worth of a job Pay grades - Grouping of similar jobs to simplify pricing jobs Wage curve - Fitting of plotted points to create a smooth progression between pay grades Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference

Job Pricing (Continued)

Single rate system - Pay ranges are not appropriate for some workplace conditions such as an assembly line Adjusting pay rates - Overpaid and underpaid jobs Overpaid - Red circle rate Underpaid - Correct as soon as possible

Pricing Managerial and Professional Jobs

Compensating Executives and Managers

Base Pay

Short-term Incentives

Long-Term Incentives

Executive Benefits and Perks

Pricing Managerial and Professional Jobs

What Really Determines Executive Pay?
CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and where they want to be in the short and long term.
Firms pay CEOs based on the complexity of the jobs they filled.

Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay.

Compensating Professional Employees Employers can use job evaluation for professional jobs.

Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise. Firms use the point method and factor comparison methods, although job classification seems most popular.
Professional jobs are market-priced to establish the values for benchmark jobs.

Benefits
Benefits
Indirect financial and nonfinancial payments employees receive for continuing their employment with the company.

Employee Benefits in India

Integral part of the compensation package. Determined by labor legislations, location, and tax laws. Generally, benefits include loans, housing, and transport. Other activities include celebrations, health programs, various allowances, family involvement, flexi timings.

Some Required and Discretionary Benefits

Types of Benefits Family-Friendly Benefits

Subsidized child care Sick child benefits Elder care Time off Subsidized employee transportation Food services Educational subsidies Fitness and medical facilities Flexible work scheduling

Types of Benefits
Flexible Benefits Programs
Cafeteria (Flexible Benefits) Approach Each employee is given a limited benefits fund budget to spend on preferred benefits. Flexible Work Arrangements Flextime schedules Compressed workweek schedules Job sharing Work sharing Telecommuting

Types of Benefits
Payment for Time not worked
Hours of Work Paid Holidays Shift Premium Holiday Pay Paid Vacation

Employee Security
Retrenchment Compensation Lay Off compensation

Types of Benefits
Safety and Health
Safety measures
Workmens compensation Health benefits

Welfare Recreational Facilities

Canteen Housing Counseling Holiday Home Education facilities Transportation

Types of Benefits Old age retirement benefits

PF Gratuity Pension