- Compensation
- Compensation Administration
- Types of Compensation
- Objectives of Compensation
- Nature of Compensation
- Principles of Wage and Salary Administration
- Components of Salary Administration
2. Compensation: Introduction
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. Compensation may achieve several purposes assisting in
recruitment, job performance, and job satisfaction.
Employee compensation refers to the benefits (cash, vacation, etc.) that an employee
receives in exchange for the service they provide to their employer. Employee
compensation is generally one of the largest costs or expenses for any organization.
3. Compensation Administration: Introduction
The goal of compensation administration is to design a cost-effective pay structure that
will attract, motivate, and retain competent employees. The structure should also
appear fair to employees. Fairness is a term that frequently arises in the administration
of an organization’s compensation program.
Apart from meeting legal requirements, organizations have to take care of employee
expectations and competitive pressures while designing an effective compensation plan.
Compensation is what employees receive in exchange for their contribution to the
organization. Compensation is a comprehensive term including pay, incentives and
benefits offered by the organization.
4. Types of Compensation
One tangible component of a compensation program is direct compensation, whereby
the employer provides monetary rewards for work done and performance results
achieved. Base pay and variable pay are the most common forms of direct
compensation. The most common indirect compensation is employee benefits.
Base Pay
The basic compensation that an employee receives, usually as a wage or a salary, is
called base pay. Many organizations use two base pay categories, hourly and salaried,
which are identified according to the way pay is distributed and the nature of the jobs.
Hourly pay is the most common means and is based on time. Employees paid hourly
receive wages, which are payments calculated based on time worked. In contrast,
people paid salaries receive the same payment each period regardless of the number of
hours worked. Being paid a salary has typically carried higher status for employees
than has being paid a wage.
5. Types of Compensation
Variable Pay
Variable Pay Another type of direct pay is variable pay, which is compensation linked
directly to individual, team, or organizational performance. The most common types of
variable pay for most employees are bonuses and incentive program payments.
Executives often receive longer-term rewards such as stock options. There is reason to
believe that performance-based policies for rewarding top managers that link equity-
based incentives to performance are effective.
Benefits
Many organizations provide rewards in an indirect manner. With indirect
compensation, employees receive the tangible value of the rewards without receiving
actual cash. A benefit is a reward - for instance, health insurance, vacation pay, or a
retirement pension - given to an employee or a group of employees for organizational
membership, regardless of performance. Often employees do not directly pay for all of
the benefits they receive.
6. Objectives of Compensation
To attract well-qualified and competent personnel.
To motivate them for higher levels of performance by making arrangement of
incentive payments.
To retain the present workforce by keeping their pay levels at the competitive levels.
To raise the morale of workforce.
To establish internal as well as external equity. Internal equity refers to payment of
similar wages for similar work. External equity means payment of similar wages to
similar jobs in comparable firms.
To maintain the labour and administrative costs in line with the ability of the
organization to pay.
To comply with wage legislation.
To reward the desired behaviour such as good performance, loyalty, dedication, etc.
7. Nature of Compensation
Employees offer their services for three types of rewards. Pay refers to the base wage
and salaries employees normally receive. Compensation forms such as bonuses,
commissions and profit sharing plans are incentives designed to encourage employees
to produce results beyond expectations. Benefits such as insurance, medical,
recreational activities etc. represent a more indirect form of compensation.
Compensation offered by an organization can come both directly through base pay and
variable pay and indirectly through benefits.
Base Pay: It is the basic compensation an employee gets, usually as a wage or salary.
Variable Pay: It is a compensation linked with performance accomplishments.
Benefits: These are indirect rewards given to an employee or group of employees as a
part of organizational membership (health insurance, vacation pay, retirement, pension
etc.)
8. Compensation Administration: Wages in India
Different acts in India include different items under wages, although basic pay and dearness
allowance are included in all acts related to compensation. Under Workmen’s Compensation Act
1923, wages for leave period, holiday pay, overtime, bonus and good conduct bonus is also
included in compensation.
The following remuneration are included under compensation:
- Bonus and other payments under profit sharing scheme
- Value of house accommodation, light, water, medical attendance, travelling etc.
- Contribution to pension, PF, social security etc.
- Other services
The wage administration in India can be examined broadly under the following heads:
Basic wage
Dearness Allowance
It is the allowance that is paid to employees in order to enable them to face the
increasing dearness of essential commodities. It serves as a cushion, a sort of insurance
against the increasing price levels of the commodities. DA is paid to neutralize the effects
of inflation.
9. Compensation Administration: Wages
Different acts in India include different items under wages, although basic pay and
dearness allowance are included in all acts related to compensation. Under Workmen’s
Compensation Act 1923, wages for leave period, holiday pay, overtime, bonus and good
conduct bonus is also included in compensation.
The following remuneration are included under compensation:
- Bonus and other payments under profit sharing scheme
- Value of house accommodation, light, water, medical attendance, travelling etc.
- Contribution to pension, PF, social security etc.
- Other services
10. Wage and Salary Administration
Employees compensation may be defined into two types: Base Compensation and
supplementary Compensation.
Base compensation refers to the monetary payments to the employees in the form of
wages and salaries. The term ‘wages’ implies remuneration to the workers doing the
manual job. The term ‘salaries’ is usually defined to mean compensation to office,
managerial, technical and professional staff.
Supplementary compensation signifies incentive payments based on actual
performance of the employees or a group of employees.
The term compensation administration or ‘wage and salary administration’ denotes the
process of managing a company’s compensation program. The goals of compensation
administration are to design a cost effective pay structure that will attract, motivate
and retain competent employees.
11. Objectives of Wage and Salary Administration
- To establish a fair and equitable remuneration offering similar pay for similar work.
- To attract qualified and competent personnel.
- To retain the present employees by keeping wage levels in tune with competing rules.
- To control labour and administrative cost s in line with ability of the organizations to
pay.
- To improve motivation and morale of employees and improve union-management
relationships.
- To comply with legal needs relating to wages and salaries.
12. Principles of Wage and Salary Administration
- Wage and salary plans must be flexible adequately.
- Scientific job evaluation must be in place.
- Wage and salary administration must be in line with the organizational plans and
programs.
- It should be responsive to the changing social, legal, economical and local and
national circumstances.
13. Components of Salary Administration: Incentive Plans
In addition to the basic wage structure, organizations sincerely committed to
developing a compensation system designed around performance should consider
incentive pay. Typically given in addition to—rather than in place of—the basic wage,
incentive plans can add a dimension to the wage structure.
Incentives can be paid based on individual, group, or organization-wide performance—
a pay-for-performance concept.
Individual Incentive Plan
Individual incentive plans pay off for individual performances. Popular approaches
include merit pay, piecework plans, time-savings bonuses, commissions, and stock
options. One popular and almost universally used incentive system is merit pay. Under a
merit pay plan, employees who receive merit increases have a sum of money added to
their base salary.
14. Individual Incentive Plan
Somewhat similar to a cost-of-living raise, merit pay differs in that the percentage of
increase to the base wage rate is attributable solely to performance. Those who perform
better generally receive more merit pay.
Although the merit pay plan is the most widely used, the best-known incentive is
undoubtedly piecework. Under a straight piecework plan, the employee is typically
guaranteed a minimal hourly rate for meeting some pre-established standard output.
When output exceeds this standard, the employee earns so much for each piece
produced. Differential piece-rate plans establish two rates—one up to standard, and
another when the employee exceeds the standard. The latter rate, of course, is higher to
encourage the employee to beat the standard. Individual incentives can be based on
time saved as well as output generated.
Components of Salary Administration: Incentive Plans
15. Group Incentive Plan
Each individual incentive option we describe also can work for groups. That is, two or
more employees can be paid for their combined performance. Group incentives make
the most sense where employees’ tasks are interdependent and thus require
cooperation.
Organization Wide Incentives
Organization-wide incentives aim to direct the efforts of all employees toward achieving
overall organizational effectiveness. This type of incentive produces rewards for all
employees based on organization-wide cost reduction or profit sharing.
One of the best-known organization-wide incentive systems is the Scanlon Plan. It seeks
cooperation between management and employees through sharing problems, goals,
and ideas. (It is interesting to note that many quality circle programs instituted in the
1980s were a direct outgrowth of the Scanlon Plan.)
Components of Salary Administration: Incentive Plans
