Subject: COMPENSATION MANAGEMENT Credit: 4 SYLLABUS Objectives of Compensation


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  So in nutshell we can say that employee compensation refers to all the forms of pay or rewards going to employees and arisingfrom their employmentCompensation includes direct cash payments, indirect payments in the form of employee benefits & incentives to motivateemployees to strive for higher leveis of productivity is a critical component of employment relationship. Often there is a balance (equity) that must be reached between themonetary value the employer is willing to pay and the sentiments of worth felt be the employee.

b. To Employers

  While the basic wage or pay is the main component of compensation, fringe benefits and cash and non-cash benefitsinfluence the level of wages or pay because the employer is concerned more about labor costs than wage rates per se. Though the management might favour such a move some sections of thework force are concerned that the introduction of the company conveyance facility may cut down their wages .the companyunder disguise of compensation allowance pays Rs.20/- per month for traveling to employees staying more than 8 kmaway from the company premises.


  They include income distribution through narrowing ofinequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power), theconcept of equal pay for work of equal value compensation management strives for internal and external equity. E fficiency objectives arereflected in attempts to link to link a part of wages to productivity or profit, group or individual performance,acquisition and application of skills and so on.

ii. The W ork Situation

  Among the things that determine the supply oflabor are the number of able people in the population, their willing ness to work, labor laws and regulations, and the healthof the economy and firms, labor laws and regulations, as well as the price and supply of other factors of production. Notes IO N M A N A G E M E N T Learning Object ives COM P E N S A T To understand the Preparation of a Wage Structure Wage Surveys The greater the accuracy and detail needed, the greater the requirements for careful description and specification and Influenced by the geographic area from which people are drawn, the number of units competing for this labor, accuracyrequirements, and willingness of organizations to share information.

c. Accuracy The diversity in job titles and specific job duties is staggering


  IO N M A N A G E M E N T Learning Object ives COM P E N S A T To understand the Preparation of a Wage Structure Wage Surveys The greater the accuracy and detail needed, the greater the requirements for careful description and specification and Influenced by the geographic area from which people are drawn, the number of units competing for this labor, accuracyrequirements, and willingness of organizations to share information. Besides the basic factors provided bya job description and job evaluation, those that are usually taken into consideration for wage and salary administration are: A sound wage policy is to adopt a job evaluation programme are not paid to the employees as are paid by the organization’s competitors, it will not be able to attract and maintain asufficient quantity and quality of manpower.

1. The Organization’s Ability to Pay

  But another part of the negotiations is for a “better job.”Workers in jobs where there is a shortage of qualified workers will demand changes in job content that will increase the job’svalue to the organization and in the eyes of other workers. These have a decisive influence on the wage structure and wagelevel since judgment is exercised in many areas of wage and salary administration - including whether the firm should paybelow average, or above average rates, what job factors should be’ used to reflect job worth, the weight to be given forperformance or length of service, and so forth, both the structure and level- of wages are bound to bound to be affectedaccordingly.

11. Skill Levels Available in the M arket

  Moreover, given the imbalanced positions of the employer and the employee, the government has had often to appoint wageboards to determine the wages in particular industries: You are also perhaps aware of the labour courts and industrial tribunalsset up by the government to settle wage disputes by adjudication. Principles of W ages and Salary Administration The generally accepted principles governing the fixation of wages and salary are:(i) There should be definite plan to ensure that differences in pay for jobs are based upon variations in job requirements,such as skill effort, responsibility or job or working conditions, and mental and physical requirements.(ii) The general level of wages and salaries should be reasonably in line with that prevailing in the labour market.


  According to the Committee on Fair Wages, “it is the wage which is above the minimum wage but below the living wage.”The lower limit of the fair wage is obviously the minimum wage; the upper limit is set by the “capacity of the industry topay.” The committee envisages that while the lower limit of the fair wage must obviously be the minimum wage, the upperlimit is equally set by what may broadly be called the capacity of the industry to pay. Fair Wage The living wage may be somewhere between the lowest level of the minimum wage and the highest limit of the living wage,depending upon the bargaining power of labour, the capacity of the industry to pay, the level of the national income, thegeneral effect of the wage rise on neighboring industries, the productivity of labour, the place of industry in the economy ofthe country, and the prevailing rates of wages in the same or similar occupations in neighboring localities.

1. Time Rate

  (3) As all the workmen employed for doing a particular kind of work receive the same wages, ill will and jealousy amongthem are avoided; The merits of the system are:(1)It is simple, for the amount earned by a worker can be easily calculated;(2)As there is no time limit for the execution of a job, workmen are not in a hurry to finish it and this may meanthat they will pay attention to the quality of their work; 2. (4)Due to the slow and steady pace of the worker, there is no rough handling of machinery, which is a distinct advantagefor the employer; COM P E N S A T Without it, the employer will continue to pay extravagantly for his work; with it he will stifle the rising ambition of hismen.” Under this plan, a worker, working in given conditions andwith given machinery, is paid exactly in proportion to his physical output.

3. Balance or Debt M ethod

  (iv)As the direct labour cost per unit of production remains fixed and constant, calculation of costs while filling tendersand estimates becomes easier.(v) Not only are output and wages increased, but the methods of production too are improved, for the worker demandsmaterials free from defects and machinery in perfect running conditions. The differentials that can be attributed to imperfections in the employment markets, such as the limited knowledge ofworkers in regard to alternative job opportunities available elsewhere; obstacles to geographical, occupational or inter-firmmobility of workers; or time lags in the adjustment of resource distribution and changes in the scope and structure ofeconomic activities.

ii. Inter-firm Differentials

  COM P E N S A T IO N M A N A G E M E N T Differences in technological advance, managerial efficiency,financial capacity, age and size of the firm, relative advantages and disadvantages of supply of raw materials, power andavailability of transport facilities - these also account for considerable disparities in inter-firm wage rates. E lements or Ingredients of a good wage planBefore going ahead with the plans and elements of a good wage plan, first let us discuss why a good wage plan is required?

iii. Inter-area or Regional Differentials

  Juan Somavia,Director General of the ILO and said it provides the right direction and thrust for the policies and programmes of the The Labour Minister pointed out that every worker as human being deserves to be treated with dignity, equality and respectand these should be integrated in the employment and wage policies of the Governments. Rates of pay are therefore influenced not only by the scope of the job in terms of its impact on results but also by the size ofresources controlled, the amount of authority job holders possess, the degree of freedom they have to make decisions andto act, and the extent to which they receive guidance or instruction on what they should do.


  Majority of the wage boards examined the question ofneed based minimum wage and concluded that it was not feasible to implement the norms approved at the 15th session of ILC because of one or more of the following reasons; (a) itwould be beyond the capacity and the industry in the to pay (b) it would unduly affect the relativity of wages among industriesin the same region. The commissionsdismissed the special pleadings of the government on three grounds:(a) that inflation does not automatically follow wage revision;(b)that as an authority entrusted with the work of deciding wages according to the workers needs, the commission couldnot and should not entertain this unproved contention and (c) that it was the responsibility of the government to control the inflationary consequences of wage revision byappropriate policies of price control and increased production.


  The evaluation may be achieved through the assignment of points or the use of some othersystematic method for essential job requirements, such as skills, experience and responsibility.”In the words of the Netherlands Committee of E xperts onJob E valuation, “job evaluation is a method which helps to establish a justified rank order of jobs as a whole Being afoundation for the setting of wages. The principle upon I all job evaluation schemes are based is that of describing and assessing the value jobs in the firms in termsof a number of factors, the relative importance of which varies from job to job:(i) To secure and maintain complete, accurate and impersonal descriptions of each distinct job or occupation in the entireplant; The evidence on use of job evaluation in the United States shows that smaller companies are somewhat less likely to usejob evaluation.

1. The Committee Approach

  It involves, in other words, a formal and systematic comparison of jobs in order to determine the worth of one job relative toanother, so that a wage or salary hierarchy results. When jobs are evaluated, the relative worth of a given collection of duties and responsibilities to the organisation is assessed.

4. Union Involvement in Job Evaluation

  If a union rejects an invitation to participate in job evaluation and ignores the plan, the employer installs the plan unilaterally,recognizing the need for a logical hierarchy of jobs. Determining the (1) that it restricts collective bargaining on wages,(2) that wages shouldn’t be based solely on job content,(3) that supervisors do not or cannot explain the plan to employees,(4) that management doesn’t administer the plan the way it explained it, and(5) that it is subjective.


  It was decided to placeemployees in a common category of jobs on the basis of their seniority in order that the senior most in that category -wouldget the highest job whether or not he fulfilled the requirements 1. In P E the meantime, a section of the employees, particularly those in N S the Laboratory and some in the Production Department, whose A T job after evaluation had gone down in ranking, expressed IO doubts about the validity of the report.


  Basic Procedure of job evaluation The basic procedure of job evaluation is to compare the content of jobs in relation to one another, in terms of their skills or After studying the principles of job E valuation it is important to know the process and procedures involved in job evaluation,it is useful at this point to understand the steps in the process. (2)the assembler, who prepares the flowers by wiring and wrapping with Para film strips(3) the ribbon tier, who prepares bows and marline backing(4) the floral designer, who quickly arranges the curse flowers and attaches the ribbon and marline, and(5)the boxer, who places the corsage in a bag and box.

C. Occasional: None

  VII Duties A Daily 5 percent 1 10 percent 270 percent 3 5 percent 4Delivers flower orders to all parts of the city and collects moneyReceives load of orders and district assignment from delivery chief. 1 Performs various types of maintenance work, such as painting, constructing tablesand shelves, making flower gardens, etc., under the supervision of the productionsupervisor.

VIII. Job-knowledge requirements: Order procedure, flower

  4 Wires flower by inserting wire through the calix, and bending to form substitute stem.35 percent 5 Wraps Para film strips around calix and down around wire. Telephones officials of firms, introduces self and company, and informs them of special flower offers for industrialaccounts.

C. Occasional: None. 14 percent VIII Job-knowledge requirements: and flower characteristics

11 Duties A Daily “percent 1 1. Prepares advertising copy for local newspapers

  Notes Mechanism: Under this system, all jobs are arranged or ranked in the order of their importance from the simplest to thehardest, or in the reverse order, each successive job being higher or lower than the previous one in the sequence. The ranking system of job evaluation usually measures each job in comparison with other jobs in terms of the relativeimportance of the following five factors:(i) Supervision and leadership of subordinates;(ii)Co-operation with associates outside the line of authority;(iii) Probability and consequences of errors (in terms of waste, damage to equipment,delays, complaints, confusion,spoilage of product, discrepancies, etc.); Professor Rs.5000-8000Associate Professors Rs.

1. The Ranking System

  For example, menials may be put into one class; clerks in another; junior officers in a higherclass; and the top executive in the top class. Table 1.3 Grades Description of Job Classification IO N M A N A G E M E N T M erits Table 1.3 gives us the gradations of five classes designed by a title label and increasing in value.

2. Job Classification or Grading M ethod

  M echanism Under this system, a number of pre-determined grades or classifications are first established by a committee and then thevarious jobs are assigned within each grade or Grade descriptions are the result of the basic job information which isusually ‘ed from a job analysis. Since many workers think of jobs in, or related to, clusters or groups, this method makes it easier for themto understand rankings.(iii) If an organization consists of 500 people holding to different jobs, the jobs might be broken up into perhaps 5classes, arranged in order of importance from high to low, and described class by class.

3. The Points System

  The first degree, three months or less may be assigned 5 points; the second degree, 3 to 6 months, given 10 points, the thirddegree, 6 to 12 months, assigned 15 points; the fourth degree 1 to 3 years, assigned 20 points; and the fifth degree is over 3years, and is assigned 25 points. Thepoint to note is that the major factors are assigned total points and that each of these factors is broken up into sub-groups(with written definitions for each), and these sub-groups are assigned points within the total established for the majorgroup.

2. Effort:

  Job Conditions: (x) Working conditions 25 50 Table 1.8Scale of Value for ‘E ducation’ F actor in NMTA Point System “ Job evaluation determines the worth of job and not of job holder” examine the statement and explain the nature of jobevaluation. (ii) Effort (i) In operating an adding machine, the knowledge of which key to depress for a sub-total would be a skill.(ii)In automobile repairs, the ability to determine the significance of a certain knock in the motor would be a skill.(iii)In a hand firing boiler, the ability to determine from the appearance of the firebed how coal should be shovelled overthe surface would be a skill.

a. Physical

  Relationships COM P E N S A T (2)The task of defining job factors and factor degrees is a time-consuming and difficult task. Human responsibility (3) If many rates are used, considerable clerical work is entailed in recording and summarizing the rating scales.(4) It is difficult to determine the factor levels within factors and assign values to them.

V. Factors Relating to Environmental Conditions:

  Demerits The system suffers from the following shortcomings:(i) It is costly to install, and somewhat difficult to operate for anyone who is not acquainted with the general nature of jobevaluation techniques.(ii) Wage levels change from time to time, and their minor inconsistencies may be adjusted to bring all the jobs intoalignment. (iii)Money rates, when used as a basis of rating, tend to influence the actual rate more than the abstract point.(iv)The system is complex and cannot be easily explained to, and understood by, every day non-supervisoryorganizational employee.(v) The use of five factors is a growth of the technique developed by its originations.


  According to the findings of the International RelationsSections of the Princeton University, the following conditions are necessary for the successful operation of a jobvaluation programme: COM P E N S A T IO N M A N A G E M E N T Learning Object ives When it is finally decided to install a formal system of job evaluation irrespective which system is decided upon, theutmost care must be exercised to ensure that Human as well as technical aspects are taken into account. COM P E N S A T IO N M A N A G E M E N T (ii) Paying beginners less than they are entitled to receive interms of what is required of them; (iii) Giving a raise to persons whose performance does not justify the raise;(iv)Deciding rates of pay on the basis of seniority rather than ability;(v) Payment of widely varied wages and salary for the same or closely related jobs andpositions; and(vi) Payment of unequal wages and salaries on the basis of race, sex, religion or political differences.

I. L.O., Publication claims follow ing advantages for job Evaluation:

  Some of these may be getting more and others less than the ratedetermined by job evaluation.(viii) Job evaluation takes a long time to install, requires specialized technical personnel, and may be costly.(ix) When job evaluation results in substantial changes in the existing wage structure, the possibility of implementingthese changes in a relatively short period may be restricted by the financial limits within which the firm has to operate. If the workers in a plant are unionized, it is highlydesirable that any scheme adopted should be agreed to and, if possible; developed jointly by the company and the tradeunions.(5) It is of major importance that-the number of job titles and classifications be kept to a minimum.


  There are still some who would go so far as to give an individual a decrease in salary depending on the degree to whichobjectives were missed, and in an “entrepreneurial” context, this might be acceptable: If the individual has total control over hisenvironment, the staffing, the budget, and the way the organization operated, like the self-employed business person,he should expect to reap the profits, but he should also expect to take any loss too. Moreover, since a manager is supposed to be in control of his organization and his subordinates’ reaching or not reachingtheir objectives will reflect on his abilities, it is a fair system to use in both the evaluation of the manager’s performance andhis reward.


  Equity Theory E quity theory, as developed by Adams, argues that satisfaction with pay is related to perceptions about the ratio between whatone receives from the job (outcomes in the form of pay) to what one puts into it (inputs in the form of effort and skill)compared with the ratios obtained by others. Thus, the greater the value of a set of awards and the higher the probability that receiving each of these rewards depends uponeffort, the greater the effort that will be put forth in a given situation.


  Incentivesdo not create but only aim to increase the national momentum towards productivity.”In the words of Scott, “it is any formal and announced programme under which the income of an individual, a smallgroup, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivityO utput.”According to the National Commission on Labour, “wage incentives are extra financial motivation. The aims would be, first, to reinforce values concerning performance and competence; second, toemphasize norms (accepted ways of behavior) relating to the ways in which people are managed and rewarded; and third, todemonstrate the organization’s belief in empowerment - providing people with the scope and ‘space’ to exerciseresponsibility and use their abilities to the full.


  Direct financial plans-wage incentives, pay proportional to output Indirect financial plans - fringe benefits, vacation,promotions; stimulates morale, but could be taken for granted The Prevalent Systems in India To understand the Precautions against ill effects of IncentiveSystems Another incentive system that is prevalent in Indian industries is the payment of production bonus usually at a differential ratefor the output produced in excess of the normal output for a unit of time. The adoption of objective assessment procedures and the use of functional responsibility are to be advocated inaddition to such indices of productivity as wage cost per unit sale, salary savings on inventory, etc.(xi)To make the scheme effective, a climate should be created in which the employees feel that the management is fair andjust in its dealings with them on wage incentive matters.

1. Impediments to improve productivity

2. Incentive Plans For W hite Collar W orkers/ Salesmen

  Therefore, it should beintroduced after a proper consideration of the various preparatory measures. The salesmen are usually given incentives in the form of sales commissions.

17.7 Salary + Individual bonus

  Salary Plus Commission: Commission Plus Drawing Account where not only commission is paid but the salesman is also allowed to draw on future earnings to gethim through low sales period; commission plus bonus, where salesmen are paid primarily on the basis ofcommission but they are also given a bonus for activities like“slow moving” items; and salary plus bonus, wherein salesmen are paid a basic salary; and also given a bonus forcarrying out specified activities. This isdue to several reasons, most of which become apparent when it is considered that for motivation to take place, the worker mustbelieve that his effort will lead to rewards and that he must want that reward.

9. More than one method of payment 12.7

19.3 Total 100.0 100.0 100.0 100.0

  The Rew ard M ust be Valuable to the Employees Increased monetary earnings must have the potential to satisfy the existing needs of the worker if the worker is to be attractedto them. The Plan M ust be Understandable and Easily Calculable by the Employees Several authors have suggested a list of requisites that monetaryincentive plans should meet if the incentive method is to be attractive to the employee; and at the same time administrativelysound.


  Only in(a) in consultation with key stakeholders (management, terms of specific jobs and current financial results.staff, unions); Compensation must inextricably be tied to people, their(b)on the basis of current and future business strategies; performance and the organizational vision and values that their(c) by reference to any projected changes in the culture of performance supports.the organization? (b) management of the system to protect its integrity and validity;(c) monitoring and management of the cost of managing the system with a focus on: (a) provision for proper responses to changingcircumstances;, IO N M A N A G E M E N T COM P E N S A T 11.


  The plan “converts” whatwould otherwise be after-tax employee contributions to pre-taxcontributions by means of an employee’s election, prior to the beginning of the year, to reduce pay and to have the companycontribute the amount of the reduction to pay for the coverage selected by the employee. While adopting the programme, the management shouldremember that the most of younger employees are more concerned with “take-home pay” than with “retirementbenefits.” On the other hand, older employees are “more concerned about retirement and pension programmes.”One of the major problems with compensation programme is that employees tend to think in the short rather than the longterm.


  The primary practical result of the operation of this law of supply and demand is the creation of the “going-wage rate.” Itwill be demonstrated later how the wage and salary survey of this going rate is incorporated into a job evaluation approach towage determination. Among these are the following:(1) there is no precise and accurate measure of productivity acceptable to all;(2) the reported percent increases are generally a long-term average and are not achieved each year;(3) not all industries participate equally in productivity gains and(4) use of any index does not materially reduce controversy in bargaining since the index is used as the base from which tobargain.


  Not only is the technical and economic evaluation of each entry carried out by a team of researchers from TE RI, but the finaldecision is taken by a very eminent panel of judges chaired by a former chief justice of India. Says C P Srivastava, joint general manager, Projects, IFFCO, “We feel proud to be awarded as it recognises our efforts to keep theenvironment clean.”Please answer the questions below based on the case study above: Besides, the process is made known to all potential contenders,who would be persuaded that this is a high calibre process of selection signified by the very choice of the judges who formthe selection panel.


  Other benefits such as cars, medical insurance and ‘perks’, are more in the nature of optional extras and as such may be partof the recruitment retention and incentives strategies of the organization, E ntitlements include the following: a. Similarly, the payment of these costs by the organization provides the employee with financial protection at retirement,termination, or as a result of injury, and it also provides to the workers’ dependants in case of the employees’ death.


  All memoranda, notes, records, or other documents made or composed by the E xecutive, or made available to her duringthe term of this Agreement concerning or in any way relating to the business or affairs of the Company, its subsidiaries,divisions, affiliates, or clients shall be the Company’s property and shall be delivered to the Company on thetermination of this Agreement or at any other time at the request of the Company. This Agreement is not assignable by either party except that it shall inure to the benefit of and be binding upon anysuccessor to the Company by merger or consolidation or the acquisition of all or substantially all of the Company’s assets,provided such successor assumes all of the obligations of the Company, and shall inure to the benefit of the heirs andlegal representatives of the E xecutive.

1. Charge of Paternalism

  It is these business trends which., have .governed the most important reward management developments in recent years,namely: a more strategic focus, a more flexible approach to job evaluation, greater focus on external relativities, job familymodelling, broad banding, the assessment of inputs(competences) as well as outputs in performance management processes, competence-related pay, team pay and flexiblebenefits. The union and informal- group leaders were aware of the seriousness of his situation if he did notchange, and felt that they had let the department foreman down in not being able to shed any light on the case.


  ‘Sign-Up Now’ button at the top of the page and providing Companies can participate in the survey by clicking on the W ageAccess is Convenient To assure the validity of the survey results, participants are encouraged to review the job descriptions and provide surveydata for only those positions that match their own with at least75% accuracy. The weighted average is obtained by first multiplying the number of incumbents in the position by theaverage rate of pay at the company and then dividing the sum of that product by the total number of incumbents at allselected companies.


  There are various factors affecting thissuch as the size and structure of the organisation and the industry in which it operates, strength of employee unions, theposition of the person and his importance to the organisation, the demand of particular skill sets in the industry and above allthe profits of the company. Job evaluation tries to addressthe following issues: As we enter the knowledge-era, one of the critical challenges forHR professionals would be to design practices and systems for managing the “Knowledge Workers.” However, even after fortyyears when Peter Drucker had coined the term, the definition of knowledge worker - and the understanding of the professionalsit describes - remains far from clear.

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