2. COMPENSATION MANAGEMENT
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• INTRODUCTION :
• The term compensation as a substitute word for wages and salaries,
is of recent origin. Wages is now considered as a cost factor.
Therefore, strategic management of wages and salaries is very
important for organisations.
• It has become imperative for organisations to balance the cost of
compensation and employee motivation (for retention) to survive
in a competitive world.
• Employee compensation is a better term than employee benefits or
wages or salaries. What the employee provides the employer is a
labor service, usually known as work. This labor service consists of
many different kinds of employee behavior, such as showing up
regularly and on time, carrying out tasks dependently, cooperative
with others and making useful suggestions.
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• Pay or compensation represents an exchange between the employee and
the organisation. Each gives something in return for something else. In
the past, the compensation issue was often confidential and governed by
individual employer’s preference and choice.
• However, in today’s competitive world, compensation issues are more
transparent.
• Different scholars in different countries, have defined the world
compensation from different perspectives. Globally, almost every country
views compensation as a measure of justice. Also, some countries
(particularly developed ones) consider compensation as a means of
protection against potential job loss.
• Compensation should be fair, irrespective of economic consideration.
Many scholars believe that compensation is the outcome of productivity.
In India, right from Vedic Age, the volume of work and the time required
to perform the work were considered to decide compensation.
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• In Europe, the Church advocated the principles of just
wage or compensation. The word compensation may
be defined as all forms of financial returns, tangible
;services and benefits that an employee receives in
his/her tenure of employment.
• The modern definition of compensation, however,
considers both intrinsic and extrinsic components of
compensation. While extrinsic compensation covers
both monetary and non-monetary rewards, intrinsic
compensation covers both monetary and non-
monetary rewards, intrinsic compensation reflects the
employees’ mental satisfaction with their job
accomplishments.
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• Wages and Compensation :
• A wage is a basic compensation for labor and for Labor per
period of time referred to as the wage rate. Other
frequently used terms for wages are payment per unit of
time (typically an hour or year) Total compensation
represents earnings and other benefits for labor.
• Wage Income represents total compensation and unearned
income. Wages are also referred to as economic rent, which
is the figure of total compensation, after reducing the
opportunity cost. Opportunity cost represents the cost of
something in terms of an opportunity forgone (and the
benefits which could be received from that opportunity) or
the most valuable forgone alternative.
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• The term ‘wages’ has emerged from French Word
‘wagier or gagier’ meaning to pledge or promise. The
term wage is thus meant ;to indicate making a promise
in monetary form.
• Marxian economics suggests that the payment of
wages to workers should be based on the optimal
allocation of cooperative human labor. Marxists view
that workers’ participation in the production process
can be oppressive, irrational and exploitative on the
one hand and can be beneficial to the other. Thus, it
believes that the most desirable form of labor
organisation in the workplace is one where workers
manage themselves collectively, and elect managers.
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• From financial perspective, wages are defined as the cash paid for some
specified quantity of labor, in contrast with salaries. Wages are paid based
on wage rate (based on units of time) while salaries are paid periodically
without reference to a specified number of hours worked. Given an
established job description , wages can often be negotiated by workers
through collective bargaining.
• Differences between Wages and Compensation :
• The term labor cost is best understood from the International Labor
Organisation (ILO) Geneva. Labor cost is the cost incurred by the employer
in the employment of labor. This also includes payments in respect of
time paid for but not worked, bonuses, gratuities, the cost of food, drink
and other payments in kind, the cost of workers’ housing borne by
employers, employers’ social security expenditures, the cost to the
employer for vocational training, welfare services, miscellaneous items,
such as transport of workers, work clothes and cost of recruitment and
taxes paid by the employers on employment.
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• From the employers’ perspective, therefore, the
compensation consists of all payments (in kind or in cash)
and all contributions to employees’ social security, pension,
insurance etc.
• Labor cost and the compensation of employees are thus
closely-related concepts, with many common elements.
The major part of labor cost comprises compensation of
employees. However, definition of labor cost and the
compensation of employees differ from country to country.
For example, some items of labor cost such as vocational
training are borne not by employers but by respective
government s. In India, the Central Board for Workers’
Training and the Regional Labor Institutes provide either
free or subsidized training for industrial workers.
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• The State’s contributions to wage-related social security schemes
are not included in the cost of compensation for employers. In
some countries, payroll taxes or ;employment taxes are considered
as labor costs.
• In Human Resource Management we consider the term from a
broader perspective, that is, the strategic use of wages paid to
employees. Some organisations refer to use the term rewards
instead of wages or compensation.
• Compensation or wage structure in a given case should take into
account industrial adjudication as well as considerations of right
and wrong and fairness and unfairness. Given social conscience and
the welfare policy of the state, collective bargaining is now the most
dynamic form of negotiation to decide wage structure in a
particular organisation.
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• Wage issues are no longer purely mathematical issues.
It was with this perspective that the framers of the
Constitution drew up Article 43 (part of the directive
principles of State Policy) which states that “The State
shall Endeavour to secure, by suitable legislation or
economic organisation or in any other way, to all
workers – agriculture, industrial or otherwise – work , a
living wage, conditions of work ensuring a decent
standard of life and full employment of leisure and
social and cultural opportunities. “ The declaration in
effect, assured labor that where they were not able to
secure a living wage for themselves, the government,
through legislation or means will come to their aid.
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• Two aspects of the State’s role prevent employers from taking undue
advantage of workers-strong bargaining strength and direct participation
of the state in the economic life of the nation.
• Wage Components :
• Although the term ‘wage’ is an encompassing and includes any form of
financial support and benefits , in a narrower sense wages are the price
paid for the services of labor.
• Broadly, there are two wage components – the base or basic wages and
other allowances. The basic wage is the remuneration, by way of basic
salary and allowances which are paid or payable to an employee in terms
of the contract of employment` for the work done.
• Allowances are paid in addition to the basic wage to ensure that the value
of basic wage to ensure that the value of basic wages does not fall over a
period of time. Some allowances are statutory , while others are
voluntary.
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• Most organisations pay allowances such as
holiday pay, overtime pay, bonus and social
security benefits.
• Under Sec. 2(m) wages includes ‘Wages for leave
period, holiday pay, overtime pay, bonus,
attendance bonus etc. Any award of settlement
and production bonus if paid, constitutes wages.
But under Payment of Wages Act, 1948
‘Retrenchment compensation , payment in lieu of
notice and gratuity payable on discharge
constitute wages.
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• The following types of remunerations are excluded from the purview of
wages :-
• Bonus or other payments under a profit-sharing scheme, which do not
form part of the contract of employment.
• Value of any house accommodation, supply of light, water, medical
attendance.
• Any sum paid to defray special expenses entailed by the nature of the
employment of a workmen.
• Any contribution to Pension, Provident Fund or a scheme of social
security and insurance benefits.
• Any other amenity or service excluded from the computation of wages by
a general or special order of an appropriate governmental authority.
• A wage level is an average of the rates paid for the jobs of an
organisation., an industry , a region or a nation. A wage structure is a
hierarchy of jobs to which wage rates have been attached.
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• Objectives of Compensation :
• The objectives of compensation or wages can be classified
under four broad categories – equity, efficiency, macro-
economic stability and optimum allocation of labor.
• Equity : The first category is equity, which may take several
forms. It includes income distribution through narrowing of
inequalities, increasing the wages of the lowest paid
employees, protecting real wages (purchasing power ) and the
concept of equal pay for work of equal value. Compensation
management strives for internal and external equity.
• Internal equity requires that pay be related to the relative
worth of a job so that similar jobs get similar pay.
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• Efficiency : It is often closely related to equity, because two
concepts are not antithetical. The objectives of efficiency are
reflected in attempts to link a part of wages to productivity or
profit, group or individual performance acquisition and
application of skills and so on.
• Macro-economic stability – It can be achieved through high
employment levels and low inflation. For instance, an
inordinately high minimum wage would have an adverse
impact on levels of employment.
• Efficient allocation of labor : The efficient allocation of labor
in the labor market implies that employees will move to
wherever they receive a net gain. Such movement may be
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• From one geographical location to another or from one job to
another (within or outside an enterprise). The provision or
availability of financial incentives causes such movement. For
example, workers may move from a labor surplus or low-
wage area to a high wage area. They may acquire new skills to
benefit from the higher wages paid for skills.
• When an employer’s wages are below market rates, employee
turnover increases. When it is above market rates, then
employer attracts job applicants.
• When employees move from declining to growth industries,
an efficient allocation of labor due to structural changes take
place.
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• Other Objectives of Compensation :
• Acquire Qualified Personnel : Compensation needs to be
high enough to attract applicants. Pay levels must respond
to the supply and demand of workers in the labor market
since employers compete for workers. Premium wages are
sometimes needed to attract applicants already working for
others.
• Retain Current Employees : Employees may quit when
compensation levels are not competitive, resulting in high
turnover.
• Reward Desired Behavior : Pay should reinforce desired
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• Behaviors and act as an incentive for such behavior to occur
in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility and other
behaviors.
• Control Costs : A rational compensation system helps an
organisation obtain and retain workers at a reasonable cost.
With effective compensation management, workers might
be over-paid or under-paid.
• Comply with Legal Regulations : A sound wage and salary
system considers the legal challenges imposed by the
Government and ensures the employer’s compliance.
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• Facilitate Understanding : The compensation management
system should be easily understood by human resource
specialists, operating managers and employees.
• Further Administrative Efficiency : Wage and salary
programmes should be so designed that they can be managed
efficiently.
• Principles of Compensation Formulation : The main factors
affecting wage or compensation levels within an organisation
are – external relativities, salary and individual worth.
• External relativities – Market rate as affected by supply,
demand and general movements in pay levels.
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• Individual worth : The value of the individual’s performance to
the organisation.
• Determinants of Wage Rates : Wage rates are either the
products of market forces (supply and demand). In the United
States, market forces determine wage rates. In Japan, seniority
is still the dominant factor for wage determination. Several
countries, including have enacted a statutory minimum wage
rate that fixes the price of certain kinds of labor.
• While market forces determine the wage rate in most
developed countries, workers often negotiate their wage rate
in most developed countries, workers often negotiate their
wage rate through collective bargaining wherever Unions are
present.
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• Theories of Wage Determination : There are two key
theories to determine wages – the traditional theory of
wage determination and the theory of negotiated wages.
• Traditional Theory of Wage Determination : This theory
assumes that market forces, that is, demand and supply
determine wages. Computer programmers are in short
supply, so they are able to command higher salaries. In our
country, many organisations pay very high salaries to entry-
level IT professionals, who sometimes get more than senior
managerial employees in other sectors. This is because of
demand and supply gap.
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• Theory of Negotiated Wages : Union employees can
negotiate salaries. This is done through collective bargaining .
Normally, in any unionized organisations Unions periodically
submit their memorandum to the management, asking for
wage raises to keep pace with market standards and
organisational profitability.
• Principles of Compensation Determination :
• Subsistence Theory : David Ricard (1772-1832) advocated this
theory. In Ricardo’s words, workers ;should be paid “To enable
them to subsist and perpetuate the race without increase or
diminution.” The theory is based on the notion that if workers
are paid more than the subsistence wage their numbers will
increase as they would procreate more
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• And this would bring down the rate of wages. If wages fell down
below the subsistence level, the number of workers would
decrease, as many would die of hunger, malnutrition, disease, cold
etc and many would not marry. When this happened wages would
increase again. In economics, the subsistence theory of wages
states, that in the long run, wages will be reduced to the minimum
level needed to keep workers alive.
• Wages Fund Theory : This theory was developed by Adams Smith
(1723-1790) on the assumption that wages are paid out of a
predetermined fund of wealth, the surplus savings of the wealthy.
This fund could be utilized for employing laborers for work. If the
fund was large, wages would be high; if it was small , ages would be
reduced to subsistence level. The demand for labor and the level of
wages were determined by the size of the fund.
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• Surplus Value Theory : The surplus value theory owes its developments to
Karl Marx (1818-1883) According to this theory, labor was an article of
commerce, which could be purchased on payment of the ‘subsistence
price’ . The price of any product was determined by labor and time
needed for producing it. The labor was not paid in proportion to the time
spent on work, but was paid much less, and the surplus was utilized for
paying other expenses.
• Residual Claimant Theory : The residual claimant theory advocated by
Francis Walker (1840-1897) assumes that there are four factors of
production/business activity – land, labor, capital and entrepreneurship.
Wages represent the amount of value created in the production, which
remains after payment has been made for all these factors of production.
In other words, labor is the residual claimant.
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• Marginal Productivity Theory : This theory assumes that wages
are based upon an entrepreneur’s estimate of the value that will
probably be produced by the last or marginal worker.
• Types of Wages in India :
• Any minimum rate of wages or revised may consist of a basic rate of
wages and a special allowance
• The Central Government appoints a Central Advisory Board to
advise the central and state governments on the fixing and revising
of the minimum rate of wages.
• Wages in Kind : Minimum wages payable under this Act are to be
paid in Cash. However, the payment of minimum wages can be
made partly in cash and partly in kind.
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• Payment of minimum rate of wages : The employer is
required ton pay every employee, engaged in a scheduled
employment under him, wages at a rate not less than the
minimum rate of wages notified for that class of employee,
without any deduction except as may be authorized.
• Overtime : If any employee whose minimum rate of wages is
fixed under the Act works on any day in excess of the number
of hours constituting a normal working day, the employer is
required to pay him for excess hours at the overtime rate fixed
under this Act or under any law of the appropriate
government for the time being in force, whichever is higher.
• A rest day should be allowed in a week.
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• Living Wage : Living wage is defined as ‘One which should
enable the earner to provide for himself and his family not
only the bare essentials of food, clothing and shelter but a
measure of comfort, including education for his children,
protection against ill-health, requirements of essential social
needs and a measure of insurance against more important
misfortunes, including old age.
• The Supreme Court has ruled that minimum wage must be
paid in any event, irrespective of any extent of profits, the
financial condition of the establishment or the availability of
workers at lower wages.
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• The wages be fair, that is, sufficiently high to provide a
standard family with food, shelter, clothing, medical care and
education of children appropriate to the workers.
• Wages must be paid on industry-wise and region wise basis,
having due regard to the financial capacity of the unit.
• Fair Wage : Fair wage represents the wage above the
minimum wage but below the living wage. The lower limit of
the fair wage is obviously the minimum wage. The fair wage
is an adjustable step.
• Wage Board – The Government aware of the problems of the
organized labor sector felt that the trade unions had
inadequate bargaining power.
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• The Wage Boards are tripartite in character. , that is
representatives of workers, employers and independent
members. The utility of these boards are debatable. So far
Government has appointed wage boards for Journalists and
non-journlist newspaper organisations, Sugar Sector.
• Types of Executive Compensation : Executive compensation
packages typically comprise the following components :-
• 1.Base salary 2. Annual incentives 3. Long term compensation
(shares) 4. Special severance and retirement arrangements.
• Compensation Trends in India :
• There is a substantial difference in gross compensation for
Managers and their immediate subordinates.
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• Companies design personalized salaries out of a basket of options
for individuals at senior levels.
• There has been a significant increase in basic salary, and hence in
deferred benefits.
• Companies have restricted non-tax perks in the form of
reimbursement under various heads to certain top levels of
management.
• Companies provide higher annual increases, average increments
varying from 50% to 100% to different levels of management.
• A soft furnishing allowance is being provided towards the purchase
of curtains, carpets, cutlery and crockery and this is usually paid as
an annual, non-taxable allowance.
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• Loans to bury-two and four wheelers are a common practice.
Interest rates may vary, with the repayment period.
• Medical benefits are common, with tie-ups with insurance
companies and hospitals in many cases. Companies organize
annual medical check-ups for all employees.
• Club memberships in the form of reimbursement of the one-
time joining fee and or annual subscription to one or more
clubs is an attractive perk for senior management.
• Soft loans for purchase of furniture, appliances and
computers re also extended to employees by some
organisation.
• Housing loan or interest subsidy is also provided.
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• Companies reimburse books, periodicals, newspapers, journals etc.
• Leased accommodation is provided.
• Elements of Employee Rewards in India :
• Basic pay or base pay is the level of pay that constitute the rate for the job.
It may act as a platform for determining additional payments related to
performance, competence or skills. It may also govern pension
entitlement.
• Additions to Base Pay :
• Individual Performance-related Pay : Increases in base pay or cash bonuses
are determined by performance assessment and ratings (also known as
merit pay).
• Bonus – It refers to rewards for successful performance and may be
related to the results by individual, team or the organsiation.
• Commissions – a special form of incentive in which sales representatives
are paid on the basis of a percentage of the sales value they generate.
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• Allowances : Elements of pay in the form of a separate sum of
money for such aspects of employment as overtime.
• Employee benefits – These benefits are also known as
indirect pay. These include pensions, sick pay, insurance cover
and company cars.
• Non-financial reward : It includes any reward that focuses on
the need people have in varying degrees for achievement,
recognition, responsibility and personal growth.
• Employee Stock Options : Stock options are common in
executive compensation. By offering stock options
particularly, companies may dilute ownership, infuse a sense
of belongingness.
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• Compensation Plan : Compensation Plan is defined as the
components of organisational compensation. A strategic
compensation plan should emphasize employee retention ,
cost efficiency and a performance-driven culture.
• Compensation Practices in India : The elements of CTC are
basic pay, HRA, CCA and other allowances, PF contribution,
medical reimbursement, food coupons etc. Thus CTC in reality
can be defined as the annual total cost of compensation to
the company, which employees may not get on hand.
35. Performance-Related Compensation Management
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• Performance Related Compensation : Employees form the
core strength of any organisation. An effective performance
management system ensures good quality of employees. The
performance system links the ability and contributions of
employees, individually and as a team, to the overall
performance of the organisation.
• A performance appraisal system in any organisation is used to
formally analyze, review and evaluate performance of an
employee.
• Performance Related Pay : The term performance-related pay
encompasses several companywide schemes, such as
employee participation and share ownership schemes which
are awarded to the employees.
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• Performance –related pay enhances corporate performance in
a competitive environment. When performance and pay are
linked together, it would be reflected in employee behavior.
For example, when organisations focus on customer
satisfaction, employees also focus on this aspect, ensuring
quality of goods and services.
• Collective relationship in the workplace are a common
organisational pursuit to achieve teamwork. Workplace and
employer relationship can be decollectivised by
individualizing, particularly reward mechanisms. Performance
related pay can be used in teamwork environment i.e. social
partnership.
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• Organisations adopt various strategies depending upon their
business priorities. A common cost minimizing strategy
requires different range of behaviors. An organsiation has to
devise a PRP (Performance Related Pay) structure in tune
with its strategies.
• Monitoring and evaluation are important and organisations
often lack focus in these areas . In teamwork systems, linkage
between the base pay and team contribution hardly exist.
Many interesting team performance bonuses and gain-sharing
scheme are available.
• Employee soften perceive compensation of senior managers
as being disproportionately higher.
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• In most of the organisations, PRP is designed by the top
management and then implemented down the line.
Participation and involvement of all cross-sections of
employees is essential. The employees also feel that they are
pat of the organisation and hence cooperate in
implementation.
• PRP can be designed either based on individual performance
criteria, such as piece rate wages or collective performance
pay schemes such as profit-sharing. Empirically it was
established that PRP increases productivity of any
organisation substantially.
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• Selection of Performance Objectives :
• Performance research should delving into the issues of identifying
the performance objectives both for the individual employee and
also for the organisation as a whole. The performance objectives
must be : (1) focused on a result (2) consistent (3) specific (4)
measurable (5) related to time (6) attainable.
• Developing Performance Standards : For effective compensation
design, developing performance standards is an important task. For
example, Task description – Write Annual Reports – Standard
Produce Monthly Reports as per departmental format and submit
to Business Heads within 5 working of the close of the beginning of
calendar month.
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• Guidelines :
• Performance Standards should be related to the employee’s
assigned work and job requirements (check job descriptions)
• Quantifiable measures may not apply for all functions.
Describe in clear and specific terms the characteristics of
performance quality that are verifiable ad that would meet or
exceed expectations.
• Accomplishment of organisational objectives should be
included where appropriate, such as cost control, improv3ed
efficiency, productivity, project completion, customer service
etc.
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• Check list :
• Are the standards realistic ? Are the standards specific ? Are
the standards based on measurable data ? Are the Standards
consistent with organisational goals ? Standards should link
individual and team performance to organisational goals ?
Are the standards challenging ? Recognizing performance
that is above expectations or outstanding is crucial to
motivating employees.
• Are the Standards dynamic ? As organisational goals,
technologies change, standards should evolve.
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• Compensation Design Through Skill-Based Programmes :
• Compensation design through a skill-based programme
rewards employees for attainment of additional skills and
knowledge. A skill-based pay system enables employees to
enjoy addition payment of compensation for new learning.
• This process can develop multi-skilled employees in an
organisation, competent to execute jobs in different cross-
functions. Fro example, Bank employees become eligible for
additional increments after completion of CAIIB examination.
College Lecturers become eligible to get additional increments
after completing Ph.D course.
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• Competency Based Pay : Theoretically, in today’s
organisations, the term competency, rather than skill is used.
Competency is more holistic, as it aggregates knowledge, skill
and abilities of employees, integrated with the behavioral
requirements. Instead of compensating for the position and
the job title, competency-based pay emphasizes on the job
accomplishments, much wider than job efficiency (outcome of
skill only).
• The major goal of any compensation programme is to
motivate employees to deliver their performance. Merit-
based pay mainly focuses on employee performance.
44. Team Based Compensation Management
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• Introduction : The team-based compensation system rewards
employees who work in a team. This means that individual
employees are compensated based on the team performance.
• It has been proved that employees working in a team deliver
better results than those who work individually. It also
requires the adoption of a collective performance evaluation
method, rather than individual assessment based on the
result areas (KRAs). A team based compensation system
emphasizes on team performance.
• Team based rewards , therefore, reward the behavior of
people working in a team who can sustain team performance.
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• Organisations adopted the idea of team work during the late
eighties, when teamwork was found more effective and
competitive operationally. The collective efforts of people in
a team setting increase overall performance and productivity.
• Teamwork helps organisations benefit from synergy,
cooperation and the unity of command. It is driven by one
aim/goal, provides flexibility, and ensures better customer
service. However, teamwork can only be efficient if the team
is composed of ‘like-minded’ , intelligent people, not just
intelligent people.
• Designing team-based compensation in an organisation is
operationally not always possible. This is because absolute
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• Teamwork is often more a myth than a reality. It may be done
through monthly or quarterly rewards to employees, based on
the degree of their improvement in performance.
• Usually 5 to 10% of base pay is provided as an incentive to
reward individual employees. Apart from team performance
criteria, team members’ contribution to productivity, cost
savings and quality are the other elements considered for
team-based compensation. Gift is the common example of
non-financial team-based compensation.
• Lump sum rewards, irrespective of base pay is a convention
used by organsiations in rewarding team members.
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• Moreover, organisations customize team-based
compensation based on organisational strategy. Team based
compensation encourages members to cooperate, as they are
rewarded based on the performance of the team as a whole.
• Individual rewards consisting of enhanced rate of bonus,
promotions, increment etc are often considered against the
principles of collectivism. Relative rewards naturally induce
competition and a moderate rate of competition in teamwork
is always possible.
• Group Incentive Plans : In team-based compensation design,
providing a group incentive to team members is often
common.
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• The entire team shares the reward based on performance
gains, which are linked to the overall profitability of the
organisation. To design an effective group incentive plan, an
organisation should first identify performance targets and the
standards of performance required to achieve the
performance targets. It then needs to document these
standards so that it can properly guide team members. In the
said documentation, the organisation also needs to specify
how rewards will be allocated.
• The group incentive plan thus helps the team members to
focus on specific performance targets.
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• Effective Design of team-based compensation : Organisations
need to link the proposed compensation design with the
strategy, culture and competencies of employees.
Understand the nature and types of teams and job categories,
evaluate performance properly and design a system.
• Organisations can have different types of teams – Project
team, hybrid teams, parallel team.
• Parallel team members are temporarily assigned some tasks
to accomplish. They are selected from different functional
areas. On completion of the assigned tasks or project, they
are sent back tot heir mother department. The design of
team-based compensation for a short time frame is difficult.
50. Team Based Compensation
Management
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• Project Team – Members work full-time in a Project Team so
the reward so the reward largely follows the principles of
equity.
• The most commonly used criteria for team-based
compensation design – are appropriate behavioral
competencies, demonstration of skill and knowledge
acquisition, achievement of specific time-bound objectives
and quantitative and qualitative objectives.
• For a project team, results are most important criteria.
51. Employee Benefits
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• Employee benefit is a holistic term , comprising of both wage
and non-wage components of total labor costs. Employee
benefits are known as fringe benefits or perks.
• When employee benefits are given in cash it is called wage or
salary. Both the wage and non-wage components are taxable
except a few.
• Going by industry practice, we can categorize employee
benefits as group insurance, retirement benefits, contribution
to social security systems, club membership, vacation leave
etc. Most employee benefits are paid by employers, while in
some such as social security benefits are paid by employers
and employees.
52. Employee Benefits
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• In some organisations, perks is used interchangeably with
employee benefits. Conventionally, perks denote those
employee benefits which are discretionary in nature and
usually paid to senior level employees
• Companies use perks even for non-discretionary or statutory
benefits. For example, canteen facilities are mandatory for
organisations that employ more than a certain number of
employees at one work location.
• Going again by industry practice, some common perks are
company cars, hotel stays, refreshments, leisure activities etc.
53. Employee Benefits
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• Non-Monetary benefits : Non-monetary benefits are used,
either when the organsiation feels that any additional
monetary compensation will reduce the cost-competitiveness
or when organisations strategically use this for motivation and
retention.
• Achieving success is the first priority. Hence any reward or
incentive, which does not strain organisational financial
health is always desirable. The aim is to motivate employees
and turn them into good performers. Although monetary
compensation is the prime mover in this respect, carefully
chosen non-monetary compensation can also do wonders.
54. Employee Benefits
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• Non-monetary benefits can be provided in various forms
(such as stock etc.). Globally, non-monetary compensation
and benefits are gaining importance. The common non-
monetary incentives are – career advancement opportunities,
flexible working hours, and opportunities to acquire new skills
and knowledge.
• The young age group values recognition and career
advancement. Functional autonomy, personal recognition,
pleasant work environment , training, flexible working hours
and challenging opportunities help attract and retain
employees.
55. Employee Benefits
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• Tax Obligations on Employee Benefits : As per tax laws,
employee benefits, both monetary and non-monetary are
considered fringe benefits. In India, they are subject to tax
liabilities. Employee benefits in the form of profit sharing acre
often used by organisations as incentive plans. Profit depends
upon organisational profitability and thus it is not predictable
or regular income for employees. Many companies allot share
to their employees.
• Organisations also often golden parachute clauses as
employee benefits, particularly, to protect executives from
possible termination in the event that company is acquired.
Such a benefit is severance pay.
56. Employee Benefits
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• Similarly, a golden handshake clause entitles employees to
receive huge benefits as a severance package. Organisations
because of restructuring may often hive off employees, giving
them the option of pre-mature retirement.
• In India, voluntary retirees availing golden handshakes can
invest their receipts in post offices up to a ceiling of Rs.15
lakhs to get a relatively higher rate of interest at 9 per cent
per annum.
• Types of Employee Benefits :
• Employment Security , Unemployment allowance or
insurance, overtime pay, leave pay, pay for holidays, lay off
compensation, retrenchment compensation etc.
57. Employee Benefits
• Medical and healthcare : Accident insurance, disability
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insurance, life insurance, medical care, sick leave etc.
• Old Age and retirement benefits – Pension, gratuity,
provident fund, old-age medical benefits for retired
employees, travelling concession for retired employees etc.
• Miscellaneous benefits – Birthday gifts, attendance bonus,
canteen, cooperative credit societies, educational facilities,
recreational programmes etc.
• Statutory benefits in India :
• Bonus – Bonus is an extra payment payable to workmen at a
minimum of 8.33 percent as minimum. Maximum @ 20% of
Basic and dearness allowance.
58. Employee Benefits
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• Retrenchment Compensation : The Industrial Disputes Act,
1947 provides for payment of compensation in case of lay-off
and retrenchment employing 50 or more workers.
Compensation is paid at the rate of 15 days of wages for every
completed year of service. Workers are eligible for
compensation in case of closure of undertakings.
• Lay off compensation – In case of lay off, employees are
entitled to 50% of the total basic wags and dearness
allowance for the period of lay off, maximum up to 345 days
in a year.
59. Employee Benefits
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• A deferred Compensation Plan is an arrangement whereby an
employee or owner defers some portion of an employee’s
current income until a specified future date.
• Life Insurance can be used to fund a deferred compensation
plan. Premiums are paid by the company. The cash value can
then be available at retirement to supplement other income.
• Objectives of fringe benefits :
• Create and improve sound industrial relations, boost
employee morale, motivate employees by satisfying their
needs, provide a good work environment and work life ,
promote employee welfare
60. Employee benefits
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• Employee benefit programes are necessary as they help to :-
• enable employees to guard against rising prices and cost of
living, avail of the most cost-effective compensation plan,
attract and retain employees, encash the opportunities of tax
saving (wherever possible)
• Demonstrate employers’ concern for employees
• Meet the legal requirements of compensation and welfare of
employees.
• Accede to the demands of the trade union.
61. Employee Motivation and
Compensation
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• Organisations design compensation as an additional
motivation for employees. Motivated employees deliver their
best and significantly contribute to organisational growth and
prosperity.
• A well-designed compensation structure can motivate
employees. Feeling motivated is an important behavioral
requirement of human resources of any organisation.
• A motivating compensation design not only motivates the
employees to become good performers, but also attracts
them to join organisations and continue with them.
• After employees are hired and trained, it is important to
motivate them to get the desired results from them.
62. Employee Motivation and
Compensation
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• Although many definitions of the term ‘motivation’ are
available, all of them converge top what energizes human
behavior, what directs such behavior and how such behavior
is maintained or sustained.
• A compensation design to derive the benefit of motivation
needs to focus on all these aspects so that the desired
behavioral out come in employees could lead to significant
changes in the organisational performance.
• After employees are hired and trained, it is important to
motivate them to get the desired results from them to
achieve the organisational objectives.
63. Employee Motivation and
Compensation
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• While designing a compensation package, employee
expectations that suitably identify their extrinsic and intrinsic
needs are perceived to be met within the given policies of the
organisations.
• But major problems on employee motivation become evident
when employees start perceiving that there is a wide
mismatch between their expectations and organisational
commitments. At times, such perceived expectations of the
employees far e4xceed the organisational commitments,
resulting in a significant gap in the perception of employees.
• Motivational factors are the perceived needs of the
employees; if needs are satisfied , it contributes to an increase
64. Employee Motivation and
Compensation
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• In performance and productivity of employees. Motivation
process starts with a physiological or psychological deficiency
or need that activates behavior or a drive that is aimed at a
goal or incentive.
• In the first stage, it is important to identify the need
deficiency of the employees. Need deficiency centres on
extrinsic and intrinsic needs. Extrinsic needs are related to
material and tangible gains. Increased pay, incentives, bonus,
better medical facilities, better retirement benefits, better
canteen facilities are some examples of extrinsic needs.
• Intrinsic needs, on the other hand are abstract in nature,
related to mental satisfaction, a sense of belonging, scope for
growth, creativity, recognition etc.
65. Employee Motivation and
Compensation
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• Organisations can identify the appropriate strategy to close
the perceived need gap of employees. There are many
innovative ways to close such a need gap without much
variation in the budget. For example, the need for increased
pay can be met by reducing deferred benefits and including
them in the current pay of employees. This is particularly
important for young employees less than 35 years.
• Objectives of Motivation :
• Motivation enhances performance and improves productivity.
The following are the important objectives of motivation :-
• Increased Efficiency : The efficiency of motivated employees
increases, as it augments their willingness to work.
66. Employee Motivation and
Compensation
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• Quality Consciousness : Motivated employees also become
quality conscious.
• Goal directed behavior : By promoting goal-directed behavior,
motivated employees also help realize organisational
objectives and strategies.
• Productive Use of Resources : Physical, financial and human
resources are the important source construct s for an
organisation.
• Motivation also promotes friendly work culture, increased
morale, increased sense of responsibility, identity with
organisation etc.
67. Employee Motivation and
Compensation
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• Motivation ensures organisational stability by reducing employee
turnover and absenteeism.
• Motive is the inner state that activates and directs the behavior of
individuals towards certain goals. Motives create a drive that
energizes individuals into action.
• Motivating implies inducements to energize work behavior.
Motivating is part of a managerial task. Managers always endeavor
to sustain the motivating environment to get work done in an
efficient and effective manner.
• Relationship between motivation and compensation : A pay
compensation system needs to be motivating in order to :-
• Attract individuals with knowledge, ability and talent as demanded
by specific organisational tasks.
68. Employee Motivation and
Compensation
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• Promote high degree of job involvement and job satisfaction
and an attitude conducive to loyalty and commitment to the
organisation.
• Similar to motivation, compensation also has two important
components. Monetary and non-monetary. Organisations
fulfill the extrinsic motivational requirements by designing
compensation that emphasizes on cash component. S0me of
the intrinsic compensation components are job security,
improved work conditions, status, sense of accomplishment,
challenging assignments, increased job responsibilities needs
to establish a correlation between performance and rewards.
69. Employee Motivation and
Compensation
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• Theories of Motivation :
• Frederick Taylor, the Father of Scientific Management
observed that prosperity of management and work force are
inter-dependent. Individuals are inherently capable of
working hard but they show such qualitie4s irregularly. To
harness this feature of individual behavior, pay and rewards
(incentives) must be linked to achievement of ‘optimum
goals’. While good performers get rewards and better pay,
bad performers lose on this count.
• Maslow , through his need hierarchy theory, established that
motivation of individuals arises from a hierarchy of needs.
70. Employee Motivation and
Compensation
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• Hackman and Oldham (1974) developed a job characteristic
model by showing how a good job design can lead to internal
motivation of the employees and contribute to better job
performance. The theory postulates that five job
characteristics like skill variety, task identity and task
significance, autonomy and feedback
• Skill variety is the extent or range of skills, abilities and talent
of the employees. The more they are able to utilize their skills
on the job, the greater their level of satisfaction. Hence jobs
are to be designed in such a way that ensures utilization of
the wide skill variety of the individuals.
71. Employee Motivation and
Compensation
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• Task significance denotes significance of a job on the life of others both
within and outside the organisation. A positive significance of a job gives
psychological satisfaction to the individual who performs a job.
• Autonomy is the extent of freedom given for a job. The more job
autonomy, the greater the job satisfaction and so also motivation.
Feedback provides the opportunity to assess the right way of executing a
job.
• Feedback provides the opportunity to assess the right way of executive a
job.
• Skill variety, task identity and task significance provide ‘experienced
meaningfulness’. Autonomy provided ‘experienced responsibility’ while
feedback provides ‘experienced knowledge of results’.
72. Employee Motivation and
Compensation
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• Motivation and Morale : Edwin Flippo (1989) defined morale
as “A mental condition or attitude of individual and groups
which determines their willingness to cooperate. If employees
appear to feel enthusiastic and optimistic about group
activities , they are described as having a good or high morale.
• Motivation stimulates individuals into action to achieve the
desired goals. It is, therefore, a function of need and drives.
It mobilizes energy, which enhances the potential for morale.
Morale, on the other hand is the individual or group attitude
towards a particular subject. It contributes to general feeling
of satisfaction at the workplace.
73. Employee Motivation and
Compensation
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• Factors that affect morale are primarily attitude and job
satisfaction level of individual employees. From an
organisational point of view, such factors can be delineated
into organisational goals, leadership styles, nature of work,
work environment etc.
• High morale is conventionally considered as a contributor to
high productivity.
• Motivational Research and Compensation Design :
• To design an appropriate compensation that motivates
employees, it is important to understand the motivational
research process. There are numerous studies on employee
motivation in the literature.
74. Employee Motivation and
Compensation
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• The ranked order of motivating factors found in a research
study :- 1. interesting work 2. good wages 3.. Full appreciation
of work done 4. job security 5. good working conditions 6.
sympathetic help with personal problems.
• In designing compensation that motivates employees, an
organisation has to appreciate human resource approaches,
which are distinctly different and traditional models.
• To motivate employees organisations need to make work
more meaningful and challenging. Employees are considered
to be creative, responsible and generally believe in self-
direction, it is important to design job that makes use of these
skills.