ch 5 compensation mgt

7/29/2019 Ch 5 Compensation Mgt

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Compensationmanagement

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By: Bhavna Behal Kumar


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MEANING AND DEFINITION :

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Compensation is the remuneration

received by an employee in returnfor his/her contribution to the

organization.

It is an organized practice that

involves balancing the work-

employee relation by providingmonetary and non-monetary

benefits to employees.

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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

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COMPONENTS OF

COMPENSATION

Wage and Salary

Incentives:Group Incentives

Individual Incentives

Fringe Benefits

Perquisites

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WAGES AND SALARY

Wages represent hourly rates of pay

Salary monthly rate of pay ,irrespective of the number of hours

put in by the employee Wages and salaries are subject to

annual increments

Differ from employee to employee

and depend on the1. nature of job

2. seniority

3. merit7


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INCENTIVES Also called payment by results

Paid in addition to wages and

salaries

Depend on productivity , sales ,

profit and cost reduction efforts

These are(i) individual incentive schemes

(ii) group incentive programmes

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FRINGE BENEFITS

include employee benefits like

Provident Fund

Gratuity

Medical Care Hospitalization

Accident Relief

Health And Group Insurance

Canteen Uniform

Recreation etc.

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PERQUISITES

These are allowed to executives in order to retain

them. They include :

Company car

Club membership

Paid holidays

Furnished house Stock option schemes etc. (ESOP, ESPP)

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NON-MONETARY BENEFITS

Challenging job responsibilities

Recognition of merit

Growth prospects

Competent supervision

Comfortable working conditions

Flexi hours

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OBJECTIVES OF

COMPENSATION PLANNING:

Attracting and Retaining Personnel

Motivating Personnel

Optimizing Cost of Compensation

Consistency in Compensation

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13Factors That Influence Compensation

Unionization

Level of

Compensationand

Benefits

Employees

tenure and

performance

Kind of job

performedSize of

company

Management

philosophy

Kind of

businessGeographical

location

Labour- or

capital-intensive

Company

profitability


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IMPORTANCE OF IDEALCOMPENSATION SYSTEM

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IMPORTANCE OF IDEAL

COMPENSATION SYSTEM

Several problems relating to personnel centre

around one element , remuneration

Absenteeism (fall sick )

Turnover

Agitation ( pelting stones , turning violent and)

In our country an average worker cares only

for money

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CONSEQUENCES OF PAY

DISSATISFACTION

Desire for morepay

performance

Strikes

Grievances

Search forhigher paying

jobs

Absenteeism

Turnover

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CONSEQUENCES OF PAY

DISSATISFACTION

Paydissatisfaction

Lowerattractiveness of

job

Turnover

Jobdissatisfaction

Psychologicalwithdrawal

Visits to thedoctor

Poor mentalhealth

Absenteeism

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IMPORTANCE OF IDEAL

COMPENSATION SYSTEM

Attractive remuneration helps the organization

to attract , retain and motivate competent

people

Retention of competent people is more

difficult than attracting fresh ones

An employees longevity of service depends

on both financial and non-financial benefits ;

the former more important in the lower levels

of hierarchy18


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IMPORTANCE OF IDEAL

COMPENSATION SYSTEM

Loyalty towards an organization

Comparison of ones remuneration with others

provides a feeling of equity / non-equity ;

equitable and consistent pay structure makes

employees stick

Employees get motivated to perform better if

their past performance has been awarded

adequately

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MOTIVATION AND

PERFORMANCE MODEL

Employee setsexpectationsand goals

Feedback to employees

Performance isrewarded

Rewards are given

Employeeconsiders equityof performancerewards

Employee sets new goals

and expectations based onprior experiences

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IMPORTANCE OF IDEAL

COMPENSATION SYSTEM

Remuneration is the only activity of HR that

has its impact on all other functions regarding

personnel

Job evaluationestablish satisfactory wage

and salary differentials

Competent people get attracted if

remuneration is good

Recruitment and selection depend on the

wages and salaries offered21


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Performance appraisal is closely related to

wages esp where payment by results schemes

exist

Incentives depend on the employee

assessment

Union management relations depend on

remuneration

Industrial conflicts occur mainly due to

remuneration22


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IMPORTANCE OF IDEAL

COMPENSATION SYSTEM

Other benefits of an effective remuneration

system :

Helps organization obtain and retain

employees at a reasonable cost

Avoids employees being underpaid or

overpaid

Helps avoid non-compliance with the

provisions of the various labour acts

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COMPENSATION

MANAGEMENT PROCESS

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Compensation Management Process

1. Organisations strategy

2. Compensation policy

3. Job analysis and evaluation4. Analysis of contingent factors

5. Design and implementation of compensation

plan6. Evaluation and review

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Discuss linkage of corporate strategy and

compensation strategy.

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DEVISING A COMPENSATION

PLAN

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DEVISING A

COMPENSATION PLANJobdescription

Job evaluation

Job hierarchy

Pay survey

Pricing jobs

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JOB EVALUATION

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JOB EVALUATION

For fixing compensation to

different jobs, it is essential

that there is internal equity

and parity among differentjob holders. JE aims to

provide this equity by

defining the relative worth ofdifferent jobs in the

organisation.

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OBJECTIVES OF JE

- Wage and salary

fixation

- Restructuring jobhierarchy

- Overcoming anomalies

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METHODS OF JOB

EVALUATIONJob ranking

Job grading /classification

Factor comparison method

Point method

Others (hay method)

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Job ranking

Managers review all the job organization &

rank them in order of their relative worth orimportance to the organization

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Ranking Method

Advantages

Simple

Alternation method

ranks highest then

lowest, then next

highest, then next

lowest

Paired comparisons

method picks highest outof each pair

Fast

Most commonly used

Disadvantages

Comparisons can be

problematic depending on

number and complexity of

jobs

May appear arbitrary to

employees

Can be legally challenged

Unreliable

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Classification Method

Advantages

Uses job

families/groups instead

of individual jobs May produce same

results as Point Method,

but is less costly

Disadvantages

Not useful when jobs

are very different from

each other May be confusing to

employees about why

jobs are included in a

class

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Factor Comparison

Compensable Factors used

Mental requirements,

Physical requirements, Skill requirements,

Responsibility, and

Working conditions

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Compensable Factors

Must be present in all jobs

Factor must vary in degree

Should not overlap in meaning All stakeholders viewpoints must be reflected

Should be demonstrable by the actual work

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Factor Comparison Method

Analyze Jobs

Select Key/Jobs

Rank Key Jobs Distribute Wage Rates Across Factors

Compare Vertical and Horizontal Judgments.

Construct the Job-Comparison Scale Use the Job-Comparison Scale to Evaluate the

Remainder of the Jobs

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Factor Comparison Method

Advantages

Customized to theorganization

Relatively easy to useonce its set up

Results in ranking ofjobs and a specific

rupee value for eachjob, based on allocatingpart of the jobs totalwage to eachfactor

Disadvantages

Using rupee values maybias evaluators byassigning more moneyto a factor than a job isworth

Hard to set up

Not easily explained toemployees

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Point Method

Advantages

Highly stable over time

Perceived as valid by

users and employees Likely to be reliable

among committee that

assesses the jobs

Provides good data toprepare aresponse to anappeal

Disadvantages

Time, money, and effort

required to set up

Relies heavily on key(benchmark) jobs, so if

key jobs and correct pay

rates dont exist, the point

method may not be valid

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INCENTIVES

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Incentives:

They are variable rewards granted to

employees according to variations in their

performance. The other name for incentives is

payment by results but the word incentiveis most appropriate because of its motivational

content.

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Incentives Program

Wage incentives include all the plans that

provide extra pay for extra performance In

addition to regular wages for the job.

It implies monetary inducements offered to

employees to perform beyond acceptance

standards.

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Different Types of Incentive Plans

Cash /Profit SharingStock Ownership or

Options

Scanlon plan

Co-partnership

Team / Group

Incentives44


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Short Term Pay-for-Performance

Plans

Merit Pay

Lump-Sum Bonuses Individual Spot Awards


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Long-Term Incentive Plans

Employee Stock Ownership Plans

(ESOPs)

Performance Plans (Performance

Share and Performance Unit)

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Profit sharing


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Under a system of individual incentives, all

or a portion of an individuals pay is tied to

their performance.


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Group Incentives

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Team/ project based incentives which

promote group cohesiveness.

Benefits:

Motivation

Cost control


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Team / Group Incentive Plans

Scanlon Plan

Profit Sharing

Co- partnership

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Types of Incentive Plans

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The ILO classifies all the schemes of payment by

results into four categories:

Earning vary inthe same proportionas output

Straight PieceWorkStandard Hour

Earnings varylessproportionate

lythan output

Halsey PlanRowan PlanBarthSchemeBedaux Plan

Earnings varyProportionately

More than outputs

High Piece Rate

High Standard Hour

Earnings differat different levelsof output

TaylorsDifferential

Piece RateMerrick

DifferentialPiece Rate

Gantt TaskSystemEmersonsEfficiency

plan


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Halsey Plan

Rowan PlanBarth Plan

Bedaux Plan

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Time - Based

Output - Based

Taylors Differential Piece Rate

Merrick Differential Piece Rate

Gantt Task System

Emersons Efficiency plan


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Halsey Plan

In Halsey Plan, bonus paid to a worker is equal to50 percent of time saved multiplied by rate perhour.

Std Time= 10 HrsRate per hr= Re 1

Case 1 time taken= 10 HrsEarnings = 10* 1 = Rs 10

Case 2 Time taken = 12 Hrs

Earnings = 12* 1 = Rs 12Case 3 Time taken = 8 Hrs

earnings = 8*1 = Rs 8Bonus = *2*1 = Rs 1.00

= Rs 8 + Re 1=Rs 9


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Rowan Plan

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In Rowan Plan, bonus paid to the employee is equalto the proportion of the time saved to the standardtime.

Std Time= 10 HrsRate per Hr= Re 1

Case 1 time taken= 10 HrsEarnings = 10* 1 = Rs 10

Case 2 Time taken = 10 HrsEarnings = 12* 1 = Rs 12

Case 3 Time taken = 8 HrsEarnings = 8*1 = Rs 8

Bonus = 2/10*8 = Rs 1.60= Rs 8 + Rs 1.60

= Rs 9.60


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Barth Plan

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The employees pay is ascertained by multiplying

the Standard hour rate by the number of hoursactually taken to do the job, taking the square rootof the product and multiplying it by the employeeshourly rate.

Std Time= 10 Hrs

Rate per Hr= Re 1

Case 1 time taken= 10 Hrs

Earnings = Square root of 10 * 10

= 10*1= Rs 10.00

Case 2 Time taken = 12 HrsEarnings = Square root of 12* 10

= 10.95*1 = 10.95

Case 3 Time taken = 8 Hrs

Earnings = Square root of 8*10


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Bedaux Plan

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Under the Bedaux Plan, standard time for each job is fixed. Eachminute of the allowed time is called a point or B. Thus there are60Bs in one hour. The employee receives bonus which is equal to75% of the number of points earned, in excess of 60 per hour,Multiplied by one sixtieth of the employees hourly rate.

Std Time= 10 HrsRate per Hr= Re 1

Case 1 time taken= 12 HrsEarnings = 12 * 1

= 12.00Case 2 Time taken = 8 Hrs

earnings = 8*1= 8.00

Bonus:

Std Bs = 10*60 = 600Actual Bs = 8*60 = 480Bs saved = 120Bonus 75 * 120*1 = Rs 1.50

100 60Total earnings = 8+1.50


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Conditions for Effective Incentives Plans

Plan is clearly communicated

Plan is understood

Rewards are easy to calculate

Employees participate in administering the plan

Employees believe they are being treated fairly

Employees believe they can trust the company

and that they have security

Rewards are awarded as soon as possible after the

desired performance.


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FRINGE BENEFITS :

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Fringe benefits:

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Not linked to the employees productivity.Provided to the employees either as a

statutory requirement or on the voluntary

basis or both.Benefits and services act as a maintenance.

Provisions of benefits will work as

dissatisfiers if not provided but at the sametime do not stimulate employees for higher

performance if provided.


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Types of benefits:

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1. Employee welfare2. Social security

Payment for time not worked

Retirement benefits

- PF

- Gratuity

- pension scheme

3. Compensation benefitsWorkmens compensation act

Contractual obligations

4. Insurance benefits

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