COMPENSATION SYSTEM IN INDIA

Reteish SainiSakshi ThakurSayyed Aman

COMPENSATION

• Compensation is a systematic approach to providing monetary & non monetary value to employees in exchange for work performed.

• Compensation may be defined as money received in performance of work and many kinds of benefits that an organization provides to their employees.

OBJECTIVES

• To recruit & retain qualified employees.• To increase or maintain morale.• To determine basic wage & salary.• To reward for job Performance.• The compensation should be paid to each employee on the basis of their

abilities and training.• Compensation should be in the form of package.• It should motivate the employees towards increasing productivity.• It should be capable of taking care of employees for safety and security

needs also.• It should be flexible and clear.• It should not be excessive.

COMPENSATION COMPONENT

COMPENSATION COMPONENT

MONETARY– Direct compensation in the form of wages or salary

• Base pay (hourly, weekly, and monthly)

• Incentives (sales bonuses and or commissions)

– Indirect compensation in the form of benefits• Legally required benefits (e.g., Social Security)

• Optional (e.g., group health benefits)

NON MONETARY• Enhance dignity & satisfaction from work performed.• Promote social relationship with co-workers.• Allocate sufficient resources to perform work

assignments.• Offer supportive leadership & management.• Enhance physiological health, intellectual growth.

COMPENSATION COMPONENT

Theory Behind Compensation• Equity Theory

– Comparing inputs and outputs of a similar co-worker– Perceived inequity affects employee effort– Fairness of pay differentials between different jobs in the

organization can be established by job ranking, job classification, point systems and factor comparisons

• Expectancy Theory– People are motivated by intrinsic and extrinsic outcomes they

desire.– People will only be motivated if outcome is possible.– People will only be motivated if outcome is contingent.

“Monkeys Demand Equal Pay”

A recent study shows brown capuchin monkeys refused to play along when they saw another monkey get a better payoff for performing the same work.

The monkeys were trained to trade a granite token for a piece of cucumber. When the reward was the same for both monkeys, they took the cucumber 95 percent of the time.

But it was a different story when one monkey was given something better -- namely, a grape. Then, the other monkey often pitched a fit -- either throwing the token, refusing to eat the cucumber or giving it to the other monkey.

(Associated Press 2003)

Types of Base Pay Systems

• Job-based– Pay the job (not the person)– Market-based (external equity focus)– Point factor-based (internal equity focus)

• Skills / knowledge-based– Pay the person (not the job)– 62% of F1000 firms used some type of skill based

pay in 1999

Job Based Pay

Attraction Depends on market pricing

Motivation No performance impact

Skill Development Learn job-related and upward mobility skills

Culture Bureaucratic, hierarchical

Structure Hierarchical, individual jobs and differentiation

Cost Good control of individual pay

Individual Skill/Knowledge Based Pay

Attraction Attracts learning-oriented individuals, high skills individuals

Motivation Little performance impact

Skill Development Motivates needed skill development

Culture Learning, self-managing

Structure Flat or team-based

Cost Higher individual pay

When to Use a Job-based Pay Policy

• A job-based pay work best in situations where:– Job duties are stable.– Skills are generic.– Employees move up through the ranks over time.– Jobs are fairly standardized within the industry.

• Drawbacks of a job-based pay system– Discounts individual ability.– Discourages lateral movement.– Tends to be bureaucratic, mechanistic, and inflexible.– Employees’ perceptions of equity are more important than market

or point data.

Pricing Jobs

• First conduct job analysis – Qualifications– KSA’s

• Non-quantitative methods– Job Ranking (create hierarchy of jobs)– Job Classification (create groups of similar jobs)

• Quantitative Methods– Point factor systems– Compare “compensable factors”

• Market pricing

Variable Pay Incentives

• Linking performance to pay– Individual – Bonuses, piece-rates, stock options– Team – Bonuses and awards– Plant / Unit / Business – Gainsharing, profit sharing– Corporation – ESOP’s

• “Line of sight” is the perceived link between individual behavior and the reward.

Pay for Performance Requires

1. Definition of performance– How are we going to measure and compare people?

2. Distribution of performance– Can we distinguish high and low performers?

3. Decide the increase for each level of performance.– How large a difference between high and low

performers?

Key Strategic Issues in Compensation

• Determining compensation relative to the market.• Striking a balance between fixed and variable

compensation.• Deciding whether or not to utilize team-based versus

individual pay.• Creating the appropriate mix of financial and non-

financial compensation.• Developing a cost-effective compensation program

that results in high performance.

New Thinking for the New Millennium

• Strategic approaches to make compensation (pay) systems more responsive:– Pay the person for individual worth (knowledge, skills and

competencies) rather than for the value of a job they perform.

– Reward excellence through a pay for performance compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational objectives.

– Individualize the pay system to give employees choices in how they are rewarded and what reward they receive.

FACTOR AFFECTING

EXTERNAL• Cost of living• Society• Labor unions• Government regulations

INTERNAL• Compensation

policy• The org. ability to

pay• Job analysis &

evaluation report• Employee

CONCLUSION

We can say that good compensation can increase the productivity of an organization because its provides various rewards, bonus, schemes etc. and its compulsory for every organization.