compensation management

COMPENSATION ADMINISTRATION

EXCEL BOOKS16-1

16

Chapter

ANNOTATED OUTLINE16-2

INTRODUCTION Compensation is what employees receive in exchange for their contribution to the organization. Generally speaking, employees offer their services for three types of rewards

Base pay

Variable pay

Benefits

Compensation Administration

The most important objective of any pay system is fairness or equity, generally expressed in three forms Internal equity: where more difficult jobs are paid more

External equity: where jobs are fairly compensated in comparison to similar jobs in labour market

Individual equity: where equal pay is ensured for equal work

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Objectives of compensation planning

Attract talent

Retain talent

Ensure equity

Reward appropriately(loyalty, commitment, experience, risk raking and other

desired behaviours)

Control costs

Comply with legal rules

Ease of operation


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Equity And Pay Rates

Equity in pay rates could be achieved through five steps


Ensuring equity in pay rates Find the worth of each job through job evaluation Conduct a salary survey through the following methods

Key job matching Key class matching Occupational method Job evaluation method Broad classification method

Group similar jobs into pay grades(pay grades are groups of jobs within a particular class that are paid the same rate

Price each pay grade by using wage curve(curve in a scatter diagram representing the relationship between relative worth of jobs and wage rates)

Fix a pay rage for each grade (like pay for officer category I, II, III etc)

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Components of Pay Structure

The two essential components of pay structure are; basic wages and dearness allowance .the basic wage rate is fixed taking the skill needs of the job, experience needed, difficulty of work, training required, responsibilities involved and the hazardous nature of the job. Dearness allowance it paid to employees in order to compensate them for the occasional or regular rise in the price of essential commodities.


Components of pay structure in India Under the Workmen's Compensation Act

Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus and good conduct bonus

Under the Payment of Wages Act

Retrenchment compensation, payment in lieu of notice , gratuity payable on discharge

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The following, however, do not come under the term wages

Bonus

Payments made under a profit sharing scheme

Value of house accommodation

Medical allowances

Travelling allowances

Any other sum paid to defray special expenses incurred by the worker

Contribution to pension, provident fund

Any amenity or service excluded from the computation of wages


Components of Pay Structure

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It is the process of managing a company’s compensation (base

compensation as well as supplementary) programme Base

compensation, here, refers to monetary payments to employees in

the form of wages and salaries. It is a fixed, non-incentive kind of

payment calculated on the basis of time spent by an employee on

the job. Supplementary compensation signifies incentive payments

based on the actual performance of an employee.


Wage And Salary Administration

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Objectives To establish a fair and equitable remuneration To attract competent personnel To retain present employees To control labour cost To improve motivation and morale of employees To project a good image of the company


Wage And Salary Administration

Principles Wage and salary plans be sufficiently flexible Job evaluation being done scientifically Wage and salary plans be always consistent with overall

plans Wage and salary plans being responsive to changing conditions

Factors affecting compensation levels

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Factors influencing compensation levels

Job needs

Ability to pay

Cost of living

Prevailing wage rates

Unions

Productivity

State regulation

Demand and supply of labour

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Wage Policy In India

A wage policy offers certain guidelines for determining a wage structure. The term wage structure refers to various pay scales showing rages of pay within each grade. Three important elements of wage policy in India need to be elaborated here

Minimum wage: Wage sufficient to sustain and preserve the efficiency of the worker and offer basic amenities of life

Fair wage: It is above the minimum wage but below the living wage. It is fixed, taking into account factors such as the

productivity of labour, prevailing wage rates, level of national income and its distribution, the employer’s capacity to pay etc.

Living wage: This is the highest amount of wages proposed by the government, offering basic amenities of life and satisfying

the social needs of worker.

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State regulation of wages

Institutions involved in fixation of wages

Employer

Collective Bargaining

Legislation M inimum Wages Act

Wage Boards Payment of Wages Act

Pay Commissions Adjudication Machinery

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Wage differentials

Differences in wage rates are inevitable in any industry and the reasons are fairly obvious

Reasons for wage differentials Wag e d iffe ren tia ls R ea so n s

Interpersonal differentials Differentials in sex, skills, age, knowledge, experience

Inter-occupational differentials Varying requirements of skill, knowledge, demand-supply situation

Inter-area differentials C ost of living, ability of employers to pay, demand and supply situation, extentof unionisation

Inter-firm differentials A b il i ty o f e m p lo ye r to pay, em p loyee s ’ ba rga in ing p ow e r, deg ree o funionisation, skill needs, etc.

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Choices In Designing A Compensation System

The compensation that is followed by a firm should be in tune with its own unique character and culture and allow the firm to achieve its strategic objectives. A variety of choices confront a firm here:

Internal and external pay

Fixed vs. variable pay

Performance vs. membership

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Guidelines for effective performance based pay stems

To be fair to employees, organisations should keep the following guidelines in mind while instituting merit-pay systems

Establish high standards of performance, so that only the truly outstanding employees emerge as winners.

Develop accurate performance appraisal systems. The focus must be on job-specific, results-oriented criteria as well as employee behaviours.

Train supervisions in the mechanics of carrying out appraisals and offering feedback to employees in a proper way.

Tie rewards closely to performance.

Use a wide range of increases. Also, make pay increases meaningful.


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Suitability of job based vs. knowledge based pay systems

A job based-pay system is suitable when:

Jobs do not change often Technology is stable Lot of training is required to learn a

given job Turnover is relatively how Employees are expected to move

up through the ranks over time Jobs are fairly standardised within

the industry

Individual-based pay system is suitable when:

The firm has relatively educated employees with both the ability and willingness to learn different jobs The firm's technology, processes are

subject to frequent change Vertical growth opportunities are limited Opportunities to learn new skills exist Teamwork and employee participation are encouraged

Job vs. individual pay


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Broad banding vs. Competency based pay system

Organisations that follow a skill-based or Competency Based Pay System frequently use broad banding to structure their compensation payments to employees. Broad branding simply compresses many traditional salary grades (say 15 to 20 grades) into a few wide salary bands (three or four grades). By having relatively few job grades, this approach tries to play down the value of promotions. Depending on changing market conditions and organisational needs, employees move from one position to another without raising objectionable questions, (such as when the new grade is available, what pay adjustments are made when duties change etc.) As a result movement of employees between departments, divisions and locations becomes smooth. Employees with greater flexibility and broader set of capabilities can always go in search of jobs in other departments or locations that allow them to use their potential fully. Broad banding, further, helps reduce the emphasis on hierarchy and status. However, broad banding can be a little unsetting to a new recruit when he is made to roll on various jobs. Most employees still believe that the existence of many grades helps them grab promotional opportunities over a period of time. Any organisation having fewer grades may be viewed negatively – as having fewer upward promotion opportunities. Moreover, a number of individuals may not want to move across the organisation into other areas.

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Below market vs. above market compensation

Open vs. secret pay


Managerial Compensation In India 16-18


Executive compensation is built around three factors in India

Job complexity

Employers’ ability to pay

Managerial productivity

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Executive compensation: Private sector vs. Public sector

In a well publicised front page news sometime back The Economic Times mentioned about the miserable salary levels of top executives in public sector units in India. For example the State Bank of India chief is paid 10% of HDFC Bank Managing Director, BHEL's chief getting about Rs.10 to 12 lakhs per year as against ABB's MD getting nearly Rs.40 to 50 lakhs; Indian Oil Corporation's chief getting Rs.10 to 15 lakhs per annum as against Reliance Industries' Ambanis getting a package of over Rs.10 crore per annum. Salary levels in 'hot' private sector such as BPO, hospitality, biotechnology 'Media', IT, Telecommunications, Oil, Automobiles and Insurance are way above the packages offered to executives in public sector for various reasons such as: overstaffing, inefficient processes, pressure on margins due to competition, appointment of people without requisite skills at the top level, political interference especially in pricing the products or services, legal constraints etc.

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How to retain talent?

Improving communication

Changing work rules

Increasing pay and incentives

Ego massaging services

Non-poaching agreements

Opportunities to upgrade skills and knowledge

Offering jobs with stretch, pull and challenge

compensation management

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