Lesson 1
- 2. LESSON 1: ROLE OF COMPENSATION AND REWARDS IN THE ORGANIZATION Learning Objectives Understand the meaning of Compensation Know the role of Compensation management Importance and purpose of Compensation management in organizations If the abilities ofemployees havebeendeveloped to the pointwhere theymeet orexceed job requirements,it is now appropriate that they be equitably compensated for their contributions. The factors affecting the determination ofequitable compensation are many,varied and complex. And management must come to some decision concerning the basic wage orsalary.To motivate improved performance on the job many systems of variable compensation havebeendevisedandfinally organizations havedevelopednumerous ways ofproviding supplementary compensation in the formof fringe benefits. Now Students Lets Try to Define Exactly What Compensation Is? Compensationis a systematic approachto providing monetary value to employees in exchange forwork performed. Compensationmay achieve severalpurposes assistingin recruitment,job performance,and job satisfaction. Now lets Discuss how is Compensation used? Compensation is a toolusedby management fora variety of purposesto furtherthe existence ofthe company. Compensationmay be adjusted accordingthe business needs,goals,and available resources. Compensation may be used to Recruit and retain qualified employees. Increase ormaintain morale/ satisfaction. Reward and encourage peakperformance. Achieve internaland externalequity. Reduce turnoverand encourage company loyalty. Modify (through negotiations)practices ofunions. Recruitment and retention ofqualified employees is a common goal sharedbymany employers.To some extent, the availability and cost ofqualified applicants foropen positions is determined by market factors beyondthe control of the employer. While an employer may set compensation levels for new hires and advertise those salary ranges, it does so in the context of other employers seeking to hire fromthe same applicant pool. Morale and job satisfactionare affected bycompensation.Often there is a balance (equity)that must be reached between the monetaryvalue the employeris willing to pay and the sentiments ofworth felt be the employee.In an attempt to save money,employers may opt to freeze salaries orsalary levels at theexpense ofsatisfactionand morale. Conversely,an employerwishingto reduceemployee turnovermay seekto increasesalaries and salary levels. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing. Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment,and it has two main components.There are direct financial payments in the form of wages, salaries, incentives, commissions and bonuses and there are indirect payments in the form of financial benefits like employee paid insurance and vacations. So in nutshellwe can say that employee compensationrefers to all the forms of pay or rewards going to employees and arising fromtheir employment Compensation includes direct cash payments, indirect payments in the form of employee benefits & incentives to motivate employees to strive for higher leveis of productivity is a critical component of employment relationship. Compensation is affected by many factors like labour market factors, collective bargaining, government legislation & top management philosophy regarding pay benefits. COMPENSATION MANAGEMENT
- 3. What is Compensation Management? Process ofcompensationmanagement is to establish&maintain an equitable wage &salary structure & an equitable coststructure .it involves jobevaluation,wage&salary survey,profit sharing &controlofpay costs. Two important functionsofcompensation Equity function Motivation function Equity is based onpast ¤t performance& motivationwith which the workhas been performed in the past ¤t performance. Nature and Purpose of compensation management The basic purpose ofcompensation management is to establishand maintain an equitable reward system.The otheraimis the establishment andmaintenance ofan equitable compensation structure,i.e, an optimal balancing ofconflicting personnelinterests so that the satisfaction of employees and employers is maximized and conflicts minimized. The compensationmanagement is concerned with the financialaspects of needs,motivation andrewards.Managers,therefore,analyze and interpretthe needs of their employees so that reward canbe individually designedto satisfy these needs.Forit has been rightly said that people do what they do to satisfy some need.Before they do anything, they lookfora reward orThe reward may be money or promotion,but more likely it will be some pay-off-a smile, acceptance by a peer,receipt of information,a kind word of recognitionetc. Lets Talk About The Significance of Compensation Fromindividualstandpoint -remuneration is a major source ofan individual’s purchasing power.It determines his orherstatus,prestige &worth in society. From enterprise stand point-compensation is a crucialelement in the cost ofproduction,which is expected to permit adequateprofits leadingto increase in newcapital,expansion production,and capacity. From national point of view –dissatisfied work force hampers equitable distribution of aggregate real income among various group involved .it causes inflation. A Sound Compensation Structure Tries to Achieve These Objectives To attract manpower in a competitive market. To controlwages &salaries &labourcosts by determining rate change & frequency of increment . To maintain satisfaction of employees by exhibiting that remuneration is fair adequate & equitable. To induce & reward improved performance, money is an effective motivator. a.For employees 1. Employees are paid according to requirements of theirjobs,i.e., highly skilled jobs are paid more compensation than low skilled jobs.This eliminates inequalities. 2. The chances offavoritism(which creep in whenwagerates are assigned)are greatly minimized. 3. Job sequencesand lines ofpromotion are established wherever they areapplicable. 4. Employees’morale and motivation are increasedbecause of the sound compensation structure. b. To Employers 1. They can systematically plan forandcontrolthe turnoverin the organization. 2. A sound compensationstructure reduces the likelihood offriction and grievances overremuneration 3. It enhancesanemployee’smorale and motivationbecause adequate andfairly administeredincentives are basic to his wants and needs. 4. It attracts qualified employees by ensuring and adequate payment for all the jobs. Now we come to the principles of Compensation Differences in pay should be based on differences in job requirements. Wage &salary levelshouldbe in line with those prevailing in the job market. Follow the principle of equalpay forequal work. Recognize individualdifferences in ability & contributions. COMPENSATION MANAGEMENT
- 4. The employees & trade unions should be involvedin while establishingwage rates. The wages should be sufficient to ensure forthe worker&his family reasonable standardof living. There should bea clearly establishedprocedure forredressalofgrievances concerningwages The wage & salary structure should be flexible . Wages dueto employees shouldbe paid correctly &promptly. A wage committee should review&revise wages fromtime to time. What are the components of a compensation system? Employees as fair if based on systematic components will perceive compensation.Various compensation systems have developedto determine the value ofpositions.These systems utilize many similar componentsincluding job descriptions,salary ranges/ structures,and written procedures. The componentsofa compensationsysteminclude: Job Descriptions: A critical component ofbothcompensation andselection systems,job descriptionsdefine in writing the responsibilities,requirements,functions,duties,location, environment,conditions,and otheraspects ofjobs.Descriptions may be developed forjobs individually orfor entire job families. Job Analysis:The process ofanalyzing jobs fromwhich job descriptions are developed.Job analysis techniquesinclude the use ofinterviews,questionnaires,and observation. Job Evaluation: A systemforcomparing jobs forthe purpose ofdetermining appropriate compensation levelsforindividualjobs orjob elements.There are fourmain techniques:Ranking, Classification,FactorComparison,and Point Method. Pay Structures:Usefulforstandardizing compensation practices.Mostpaystructuresinclude severalgrades witheach grade containing a minimum salary/ wage and eitherstep increments or grade range.Step incrementsare common with union positions where the pay foreach job is pre- determined through collective bargaining. SalarySurveys:Collections ofsalary andmarket data.May include average salaries,inflation indicators,cost ofliving indicators, salary budget averages.Companies may purchase results of surveysconductedby survey vendorsormay conduct theirown salary surveys.Whenpurchasing the results ofsalary surveysconducted by othervendors,note that surveys may be conducted within a specific industry oracross industries aswellas within one geographicalregion oracross different geographicalregions. Knowwhich industry orgeographic locationthe salary results pertain to before comparing the resultsto your company. Policies and Regulations What are Different Types of Compensation? Different types ofcompensation include: Base Pay Commissions Overtime Pay Bonuses,Profit Sharing,Merit Pay Stock Options Travel/ Meal/ HousingAllowance Benefits including:dental,insurance,medical,vacation,leaves,retirement,taxes... In a layman’s language the word Compensationmeans something,suchas money,givenorreceived as payment orreparation,as fora service orloss.On the otherhand,the word Reward means something givenor received in recompense forworthy behaviororin retribution forevil acts. Now students let us try to demarcate between compensation and rewards In a layman’s language the word Compensationmeans something,suchas money,givenorreceived as payment orreparation,as fora service orloss.On the otherhand,the word Reward means something givenor received in recompense forworthy behaviororin retribution forevil acts. The word Compensationmay be defined as money receivedin the performance ofwork,plus the many kinds of benefits andservicesthat organizations provide theiremployees. On the otherhand,the word Reward orIncentive means anythingthatattracts an employees’attentionand
- 5. stimulates himto work. An incentive scheme is a plan ora programme to motivate individualorgroup performance. An incentive programme is most frequently built on monetary rewards (incentive payormonetary bonus),but may also include a variety ofnon-monetary rewards orprizes. Compensation or rewards (incentives) can be classifiedinto 1. Direct compensationand 2. Indirect compensation. Money is includedunderdirect compensation(popularly known as basic salary orwage,i.e. gross pay)where the individualis entitled to forhis job,overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunitiesto purchase stockoptions. While benefits come underindirect compensation,and may consistoflife, accident,and health insurance,the employer’s contributionto retirement (pensions),pay forvacationorillness, andemployer’s required payments foremployeewelfare as socialsecurity. While French says,the term“ Incentive system” has a limited meaning that excludes many kinds of inducementsoffered to people to performwork,or to work up to or beyondacceptable standards.It does not include: 1. Wage and salary paymentsand merit pay; 2. Over-time payments,pay forholiday workordifferentialaccording to shift,i.e.all payments which could be considered incentives to perform work at undesirable times; and 3. Premium pay forperforming danger tasks. It is related with wage payment plans which tie wages directly orindirectly to standards ofproductivity or to the profitability ofthe organization orto both criteria.Compensationrepresents by farthe most important and contentious element in the employment relationship,and is ofequalinterest to the employer,employee and government. 1. To the employerbecause it representsa significantpart ofhis costs,is increasingly important to his employee’s performance and to competitiveness,andaffects his ability to recruit andretain a labor force ofquality. 2. To the employee because it is fundamentalto his standard ofliving and is a measure of the value of his services orperformance. 3. To the government because it affects aspects ofmacro- economic stability suchas employment, inflation,purchasing powerand socio – economic development in general. While the basic wage orpay is the main componentofcompensation,fringe benefits and cash andnon- cash benefitsinfluence the levelofwages orpay because theemployeris concernedmore about labor costs than wageratesperse.The tendency nowis towards an increasing mix ofpay element of executive compensation has substantially increased in recent years. Basic Purpose for Establishment of a Sound Compensation and Reward Administration The basic purposeofestablishment ofa sound compensationand reward administration is to establish and maintain an equitable compensationstructure. Its secondaryobjective is the establishment and maintenance ofan equitable labor-cost structure,an optimal balancing ofconflicting personnelinterests sothat the satisfactionofemployees and employers is maximized and conflicts minimized. A sound wage and salary administration tries to achieve these objectives a. For employees 1. Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities. 2. The chances offavoritism(which creep in whenwagerates are assigned)are greatly minimized. 3. Job sequencesand lines ofpromotion are established wherever they areapplicable. 4. Employees’morale and motivation are increased because a wage programme can be explained and is based uponfacts. b. T o Employers 1. They can systematically plan forand controltheirlaborcosts In dealing with a trade union,they can explain the basis of COMPENSATION MANAGEMENT COMPENSATION MA
- 6. their wage programme because it is based upon a systematic analysis ofjob and wage facts. 2. A wage and salary administrationreducesthe likelihood offriction and grievances overwage inequities. 3. It enhances an employee’smorale and motivate because adequate andfairly administered wages are basic to his wants and needs. 4. It attracts qualified employees by ensuringandadequate payment forallthe jobs. Assignments 1. Discuss the concept of compensation. What factors affect compensation of employees in industrial organizations? 2. What is the basic purpose behind the establishmentof a sound Compensation and Reward administration system in the organizations? Case study Roshans Limited-Transport Facility The personnel Manager of Roshans Limited have received. an application for the introduction of company conveyance for employees staying in town. Although Roshans Limited has provided living facilities to its employees about 60percent ofits 1000 employees stillhave to commute an average of10 km to come to work. The union and some of the employee s living on campus have supported the demand . Though the management might favour such a move some sections of the work force are concerned that the introduction of the company conveyance facility may cut down theirwages the company underdisguise ofcompensation allowance paysRs.20/-permonth fortraveling to employees staying more than 8 km away from the company premises. 1. What factorswould youtake into account in evaluation of this demand fromtheworkers? 2. Provide the rationale forimplementing or not implementing this demand. Notes