COMPENSATION MANAGEMENT

Introduction

What employees receive in exchange for their contribution.

It is a comprehensive term including pay, incentive and benefits.

Compensation can come both directly through base pay and variable pay or indirectly through benefits.

It is the total amount of the monetary and non monetary pay provided to an employee in return of work performed as required.

Definition

Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity. Wayne Cascio

Objectives of compensation Efficiency

Quality Performance Cost

Fairness

Compliance

Components of a Salary Slip

Basic Pay Allowance

Dearness Allowance House Rent Allowance City Compensating Allowance Transport Allowance/ Conveyance

Allowance Incentives Fringe Benefits/Perquisites

Reflected on Pay Slip Allowances/ReimbursementsNon taxable-subject to bills

Perquisites Retirement Benefits

Basic Pay 1. Servant reimbursement

2. Conveyance Reimbursement

3. Mobile Expenses

1. Company car-with or without drivers

2. Motor Cycle3. Club Membership4. Telephone Bills

and Rentals

PF12 % of Basic +DA

Equal contribution from employer and employee

Dearness Allowance-Fully Taxable1.To face inflation2.Calculated on COLI-3.Fixed % on Basic Wage or Fixed amount

1. Entertainment Allowance

2. Soft Furnishing3. Medical

Reimbursement

( max 15000/- pa )

4.Fuel reimbursement

1. Furnished/ un furnished houses

2. Free Electricity

3. ESOP-Lock in period 3 years after date of allotment

GratuityHalf month Basic +DA of the last salary drawn for every completed year of

service minimum 5 years

Gratuity is exempt from Tax upto 3.5 L

HRA –Taxable unless rentalCalculated on Basic Salary +DA

1. Children Education

allowance-Upto 1200 per child pm ( max 2 children)

2. Corporate Attire/ Newspaper /periodicals

1. Mediclaim2. Health Group

Insurance3. Free paid

vacationsLoans1. House Loan2. Marriage Loan3. Motor Car/Scooter

Loan

ESICEmployees whose gross salary is Rs

15000/- pmEmployer’s cont-4.75%Employee’s-1.75 %

Conveyance Rs 800 pm or Rs 9600/pa Not Taxablecommuting between between the place of residence to the place of duty

1. LTA –calculated on Basic salary in a block period of 4 years

1. Refrigerator/Household

2. Study Loan

FINANCIAL

Factors affecting wages and salary The organisations ability to pay Supply and demand of labour Prevailing market rate Cost of living Ability of the organization to pay Productivity Trade union’s bargaining power Job requirements Managerial attitudes Psychological and social factors

Fringe Benefits

It may be described as the various services and programs that organizations provide to their employees in addition to compensation in the form of wages and salaries

It is sometimes referred to as the “The Hidden Payroll” of organizations.

Definition

Any wage cost not directly connected with the employee’s productive effort, performance, service or sacrifice. Balcher

Features of Fringe Benefits

They are a supplement to regular wages or salaries

It is not paid for any specific job or performance but to increase their interest in work

It is a cost for the employers

They are meant to enhance the employee's standard of living

It may be statutory or voluntary

Objectives of Fringe Benefits Attracting and retaining talent

Negotiation tool

Promote organizational image

Satisfy employee needs

Increase satisfaction and morale

Types of Fringe Benefits

Payment for time not worked: Paid holidays Shift premium Holiday Pay Paid vacation

Employee Security Safety and Health Workmen’s Compensation Health benefits Voluntary arrangements Welfare and Recreation Facilities Old Age and Retirement Benefits

Incentives

Anything that attracts an employee and stimulates him to work.

Incentives are of two types: Financial Non-financial

Definition

An incentive scheme is a plan or programme to motivate individuals for good performance. An incentive is most frequently built on monetary rewards, but may also include a variety of non-monetary rewards or prizes. Burrack and Smith

Advantages

Inducement and motivation for higher efficiency

Enhanced employee earnings

Reduction in production cost

Increased production capacity

Attraction for management

Other advantages

Disadvantages

Quality determination Problem in introduction f new machine or

methods Demand for higher minimum wage Disregard security regulations Jealousies among workers Problems in setting of piece or bonus rates Problem in determining the standard

performance

Types of Incentives Plans

Financial incentives Salary, rewards, bonus, etc

Non- Financial incentives Job satisfaction Job security Respect and recognition T&D Opportunity for growth Suggestion scheme, praise, etc.

Continued…

Individual Piecework Standard hour plan Bonus Commissions Perquisites Stock options

Group Productivity Gain Sharing plan Profit sharing plan

Essentials of Good Incentive Plan

Proper climate Cooperation of workers Workers participation Scientific standard Simplicity Equitable Flexible Less costly Guarantee minimum wages Ceiling on earning Grievance settlement on time Timely payment of incentive

Employee Welfare

It refers to various services, facilities and amenities provided to employees for their betterment.

To include such services, facilities and amenities as may be established in or in the vicinity of undertakings to enable the persons employed in them to perform their work in healthy, congenial surroundings and to provide them with amenities conducive to good health and high morale.

Types of Welfare Services Intramural welfare services

Wash basins, bathrooms and humidity Work place sanitation and cleanliness Water coolers Safety gears Canteen Basic medical aid Library Work and personal counseling Child care centers and crèches

Extramural Welfare services Housing Transportation Education facilities Health services

Case Study

Salary inequities at Acme Manufacturing

Joe Black was trying to figure out what to do about a problem salary situation he had in his plant. Black recently took over as president of Acme Manufacturing. The founder and former president, Bill George, had been president for 35 years. The company was family owned and located in a small eastern Arkansas town. It had approximately 250 employees and was the largest employer in the community. Black was the member of the family that owned Acme, but he had never worked for the company prior to becoming the president. He had an MBA and a law degree, plus five years of management experience with a large manufacturing organization, where he was senior vice president for human resources before making his move to Acme.

A short time after joining Acme, Black started to notice that there was considerable inequity in the pay structure for salaried employees. A discussion with the human resources director led him to believe that salaried employees pay was very much a matter of individual bargaining with the past president. Hourly paid factory employees were not part of this problem because they were unionized and their wages were set by collective bargaining. An examination of the salaried payroll showed that there were 25 employees, ranging in pay from that of the president to that of the receptionist. A closer examination showed that 14 of the salaried employees were female. Three of these were front-line factory supervisors and one was the human resources director. The other 10 were non management.

This examination also showed that the human resources director appeared to be underpaid, and that the three female supervisors were paid somewhat less than any of the male supervisors. However, there were no similar supervisory jobs in which there were both male and female job incumbents. When asked, the Hr director said she thought the female supervisors may have been paid at a lower rate mainly because they were women, and perhaps George, the former president, did not think that women needed as much money because they had working husbands. However, she added she personally thought that they were paid less because they supervised less-skilled employees than did the male supervisors. Black was not sure that this was true.

Continued…The company from which Black had moved had a good job evaluation system. Although he was thoroughly familiar with and capable in this compensation tool, Black did not have time to make a job evaluation study at Acme. Therefore, he decided to hire a compensation consultant from a nearby university to help him. Together, they decided that all 25 salaried jobs should be in the same job evaluation cluster, that a modified ranking method of job evaluation should be used, and that the job descriptions recently completed by the HR director were current, accurate, and usable in the study.

The job evaluation showed that the HR director and the three female supervisors were being underpaid relative to comparable male salaried employees.

Black was not sure what to do. He knew that if the underpaid female supervisors took the case to the local EEOC office, the company could be found guilty of sex discrimination and then have to pay considerable back wages. He was afraid that if he gave these women an immediate salary increase large enough to bring them up to where they should be, the male supervisors would be upset and the female supervisors might comprehend the total situation and want back pay. The HR director told Black that the female supervisors had never complained about pay differences.

The HR director agreed to take a sizable salary increase with no back pay, so this part of the problem was solved. Black believed he had for choices relative to the female supervisors:

1. To do nothing. 2. To gradually increase the female supervisors salaries. 3. To increase their salaries immediately. 4. To call the three supervisors into his office, discuss the situation with them, and jointly decide what to do.

Questions

1. What would you do if you were Black?

2. How do you think the company got into a situation like this in the first place?

3. Why would you suggest Black pursue the alternative you suggested?