Compensation Management in management II
- 3. Concept • Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing total compensation package. • Compensation is the human resource management function that deals with every type of reward individuals receive in exchange for performing an organizational task. The consideration for which labor is exchanged is called compensation. • Compensation is what employees receive in exchange for their work. It is a particular kind of price, that is, the price of labor. Like any other price, remuneration is set at the point where the demand curve for labor crosses the supply curve of labor.
- 4. Compensation and Compensation Management • Compensation is referred to as money and other benefits received by an employee for providing services to his employer. • Compensation refers to all forms of financial returns: tangible services and benefits employees receive as part an employment relationship, which may be associated with employee’s service to the employer like provident fund, gratuity, insurance scheme and any other payment which the employee receives or benefits he enjoys in lieu of such payment.
- 5. Author’s Definition • According to Dale Yoder, “Compensation is paying people for work.” • “Compensation is what employees receive in exchange for their contribution to the organization.” – Keith Davis • In the words of Edwin B. Flippo, “The function compensation is defining as adequate and equitable remuneration of personnel for their contributions to the organizational objectives.”
- 7. Importance of Compensation Management
- 9. Compensation = Wage or Salary + Employee benefits + Non- recurring financial rewards + Non- pecuniary rewards.
- 10. Direct Compensation • Direct/Monetary Compensation refers to a form of financial reward given to employees for their services at a regular time interval
- 11. Basic Wages/Salaries • Basic Wages/Salaries • It is usually the cash component of the wage structure that determines other components. It is usually a fixed amount but can be periodically changed due to increments or performance-based hikes. • Wage refers to the hourly rate of pay, and salary refers to the monthly rate of pay, irrespective of the number of hours invested by the employee. They are subjected to changes due to external factors and vary based on the industry type, nature of the job,
- 12. Allowances • Allowances are additional financial components of the compensation; they are fixed and help employees meet their daily needs above their base salary. The most common types are: • House Rent Allowance: Organizations usually compensate for employees’ housing facilities, differing based on the metro and non- metro cities. • Dearness Allowance: This helps employees face the onslaught of inflation of prices of goods and services. • Leave Travel Allowance: Employees are given allowances to take vacation time alone or with family and friends. • City Compensation Allowance: It is compensation paid to employees to cover the additional cost of living in cities and varies according to location. • Special Allowance: They give employees an additional sense of social security and motivation to work. Examples of this allowance include overtime, mobile, travel allowances etc.
- 13. Bonuses and Incentives • Incentives are paid to employees beyond their base salary and depend on their productivity, sales, profit, or cost-reduction efforts. They can be paid to an individual employee or a group of employees for their additional efforts. • A bonus is a pre-defined amount paid to employees during festive seasons or company profit. It is made mandatory by the government and usually amounts to one month’s salary to boost their confidence and social security.
- 14. Commissions • Employees receive them during a particular time, which varies according to the sales revenue or company profits. They are mostly paid to sales employees on the achievement of their targets on a monthly or a periodic basis
- 15. Stock Options • In this, employees can purchase the company’s shares at a fixed price lower than the market price, and only employees who worked for a certain period (generally three to five years) are eligible for this type of compensation.
- 16. Benefits • Employee benefits include health insurance, medical coverage, retirement benefits, legal insurance, etc. A Glassdoor survey reveals that 48% of employees consider a good benefits package over a salary while accepting a job offer.
- 17. Non-monetary / Indirect Compensation • Non-financial reward is a reward focused on the needs most people have, although to a different degree for achievement, recognition, responsibility, influence, and personal growth.
- 18. Reward and Recognition • Recognizing the employees often boosts their motivation and enhances their productivity. They can be recognized for their efforts, performance, attitude, team spirit, problem- solving ability, etc., with a reward to increase their overall performance. • Recognition can be a small gesture of ‘Well done’ or a public appreciation and be either in a verbal or written form. Small gestures of acknowledgment at regular intervals make the employees more enthusiastic and satisfied in their job role.
- 19. Promotion • Promotions promote a positive attitude among employees by providing opportunities for personal growth, increased responsibilities, and increased social status. It infuses a spirit of healthy competition among the employees, impacting the overall levels of job satisfaction and productivity.
- 20. Work-life balance initiatives • A flexible work schedule increases the mental, physical, emotional, and social wellness of employees. Introducing work-life balance initiatives like remote work, hybrid work, reduced office hours, etc., helps employees fulfill their commitments to their family and friends.
- 21. Career Development Opportunities • Employees place continuous growth opportunities and learning new skills above other needs. A proper career progression plan provides employees with social security and helps them develop skills to assist in their future roles.
- 26. • Wages are an expense for the firm and, more specifically, a variable cost because it varies with factors such as an increase in aggregate demand, seasonality, labor market fluctuations, etc. Therefore, the concept is important to laborers, the firm, and the economy, as it affects parameters like inflation, demand, etc. • Wages refer to the monetary compensation paid to the laborers based on work done. The payment is made either on an hourly or daily basis.
- 28. Minimum Wages Minimum wages have been defined as the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.
- 30. Living Wages The living wage is defined by the ILO as "the wage level necessary to afford a decent standard of living for workers and their families, taking into account the country's circumstances and calculated for the work performed during normal hours.
- 31. Fair Wages • Fair wages are a reasonable compensation for the type of work done. They can also be defined as wages that are above the minimum wage but below the living wage. The upper limit of a fair wage is determined by the industry's ability to pay. Fair wages can also consider other factors, such as: • Sustainability: Living wage and equal salary are typical sustainability dimensions of fair wages. • Performance and profitability: Fair wages can be systematically correlated with these indicators. • Employee skills: Salaries can be based on an employee's education, experience, and skillset, rather than demographic factors like age or gender.
- 32. Need based wages Need-based minimum wage is the wage rate set up based on the essential requirements that support the standard of living of an employee and their family. This includes essential elements such as food, clothing, housing, and other basic needs.
- 40. Evolution of Wage policy First Five Year Plan: • Favorability of wages. • Wages, Profits, terms and conditions, Norms and standards. • Pace of Standardization. • 50% of the D.A should be emerged with the basic wages. • Full and effective implementation of minimum wages act. • Permanent wage board with tripartite composition in each state and at the centre.
- 41. Second Five Year Plan • Workers right to fair wages has been recognized. • Industrial tribunal has not given full support to the parties concerned. • Tripartite wage board. • Equal representation of employers and workers. • Independent Chairman. • Link between pay and productivity and different perspective of productivity.
- 42. Third Five Year Plan • Recognized disparities in wages. • Setting up of Wage Boards as the most suitable method of settling disputes.
- 43. Fourth Five Year Plan • Integrated income policy. • Protection of standard of living of workers. • Linking dearness allowance with cost of living. • Total wage should have three components, • Basic or minimum wages. • Element related to cost of living. • Element related to cost of productivity • Payment by results. • Common broad approach for employers and workers. • Simple incentive schemes.
- 44. Fifth Five Year Plan The fifth plan emphasized on the need for an integrated income policy as basic to national wage policy. It although favoured linking dearness with cost of living, full neutralized at all levels not favoured. The standardization of wages and and the narrowing down of wage differentials was the keynote of the fifth plan. Payment by results was to be linked with productivity.
- 45. Sixth Five Year Plan • Eliminate malpractices in regard to wage rates and wage payment.
- 46. Wage Board