Compensation Management : Compensation is the remuneration received by an employee in return for his/her contribution to the organization.

It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness. Need of Compensation Management A good compensation package is important to motivate the employees to increase the organizational productivity. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and self-actualization needs to fulfill. Thus, compensation serves the purpose. The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards.

Types of Compensation Compensation provided to employees can direct in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary but it is the sum total of all rewards and allowances provided to the employees in return for their services. If the compensation offered is effectively managed, it contributes to high organizational productivity. Direct Compensation Indirect Compensation Know More Know More

Need of Compensation Management

A good compensation package is important to motivate the employees to increase the organizational productivity.

Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals.

Salary is just a part of the compensation system, the employees have other psychological and selfactualization needs to fulfill. Thus, compensation serves the purpose.

The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards.

Components of compensation:Basic wages/Salaries:These refers to the cash component of the wage structure based on which other elements of compensation may be structured. It is normally a fixed amount which is subject to changes based on annual increments or subject to periodical pay hikes. It is structured based on the position of an individual in the organization and differs from grades to grades. Dearness allowance:The payment of dearness allowance facilitates employees and workers to face the price increase or inflation of prices of goods and services consumed by him. The onslaught of price increase has a major bearing on the living conditions of the labour. The increasing prices reduce the compensation to nothing and the money's worth is coming down based on the level of inflation. The payment of dearness allowance, which may be a fixed percentage on the basic wage, enables the employees to face the increasing prices. Bonus:The bonus can be paid in different ways. It can be fixed percentage on the basic wage paid annually or in proportion to the profitability. The Government also prescribes a minimum statutory bonus for all employees and workers. There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Profit margin achieved. Bonus plans can also be based on piece wages but depends upon the productivity of labour. Commissions:Commission to Managers and employees may be based on the sales revenue or profits of the company. It is always a fixed percentage on the target achieved. For taxation purposes, commission is again a taxable component of compensation. The payment of commission as a component of commission is practised heavily on target based sales. Depending upon the targets achieved, companies may pay a commission on a

monthly or periodical basis. Mixed plans:Companies may also pay employees and others a combination of pay as well as commissions. This plan is called combination or mixed plan. Apart from the salaries paid, the employees may be eligible for a fixed percentage of commission upon achievement of fixed target of sales or profits or Performance objectives. Nowadays, most of the corporate sector is following this practice. This is also termed as variable component of compensation. Piece rate wages:Piece rate wages are prevalent in the manufacturing wages. The laborers are paid wages for each of the Quantity produced by them. The gross earnings of the labour would be equivalent to number of goods produced by them. Piece rate wages improves productivity and is an absolute measurement of productivity to wage structure. The fairness of compensation is totally based on the productivity and not by other qualitative factors. The GANTT productivity planning and Taylor's plan of wages are examples of piece rate wages and the related consequences. Sign on Bonuses:The latest trend in the compensation planning is the lump sum bonus for the incoming employee. A person who accepts the offer, is paid a lump sum as a bonus. Even though this practice is not prevelant in most of the industries, Equity research and investment banking companies are paying this to attract the scarce talent. Profit sharing payments:Profit sharing is again a novel concept nowadays. This can be paid through payment of cash or through ESOPS. The structuring of wages may be done in such a way that, it attracts competitiveness and improved productivity. Profit sharing can also be in the form of deferred compensation at the time of retirement. At the time of retirement the employees may be paid a lump sum or retiral benefits. Fringe benefits:The provision of fringe benefits does not attract any explanation. These includes.,

a) Company cars b) Paid vacations c) Membership of social/cultural clubs d) Entertainment tickets/allowances. e) Discounted travel tickets. f) Family vacation packages. Reimbursements:Employees, depending upon their gradations in the organization may get reimbursements based on the Expenses incurred and substantiated. Certain expenses are also paid based on expenses incurred during the course of business. In many cases, employers provides advances to the employees for incurring certain expenses that are incurred during the course of the business. Some examples are., a) Travel expenses. b) Entertainment expenses c) Out of pocket expenses d) Refreshments expenses during office routine outside office premises. Sickness benefits/pregnancy:The increasing social consciousness of corporates had resulted in the payment of sickness benefit to the Employees of companies. This also includes payments during pregnancy of women employees. The expenses incurred due to injury or illness are compensated or reimbursed to the employees. In certain companies, the death of an employee is compensated financially. Companies are also providing supporting financial benefits to the family of the bereaved employees. However, companies covering these cost through appropriate insurance policies like, Medical and life insurance.
potential appraisal refers to the appraisal i.e. identification of the hidden talents and skills of a person. The person might or might not be aware of them. Potential appraisal is a future oriented appraisal whose main objective is to identify and evaluate the potential of the employees to assume higher positions and responsibilities in the organizational hierarchy. Many organisations consider and use potential appraisal as a part of the performance appraisal processes. Potential appraisal can serve the following purposes: To advise employees about their overall career development and future prospects

 Help the organisation to chalk out succession plans Motivate the employees to further develop their skills and competencies. To identify the training needs.

Techniques of potential appraisal:

Self appraisals

Peer appraisals

Superior appraisals

MBO

Psychological and psychometric tests

Management games like role playing

Leadership exercises etc.

Potential appraisal helps to identify what can happen in future so that it can be guided and directed towards the achievement of individual and organizational growth and goals. Therefore, potential should be included as a part of the

Pay-Structures

Once job analysis has been done organizations need to decide upon the pay structures. Pay structure refers to the process of setting up the pay for a job in an organization. The process deals with internal and external analysis to estimate the compensation package for a job profile. Internal equity, External equity and Individual equity are the most popular pay structures. Job description provides the in depth knowledge about the job profile and its worth.

Pay structures are the strong determinant of employees value in the organization. It helps in analyzing the employees role and status in the organization. It provides for fair treatment to all employees. Pay structures also include the estimation of incentives.

The level of incentives also depends on the level of job position in the organizational hierarchy.

Equity
Equity or fairness has been mentioned as a key component in creating a successful compensation system. It can be defined in the following three ways:

Workplace equity refers to the perception that all employees in an organization are being treated fairly External pay equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations Internal pay equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization

Perceived inequity or unfairness, either external or internal, can result in low morale and loss of organizational effectiveness. For example, if employees feel they are being compensated unfairly, they may restrict their efforts or leave the organization, damaging the organizations overall performance.

Internal equity
Internal equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization. Another way of stating this is to say that a persons perception of their responsibilities, rewards and work conditions is seen as fair or equitable when compared with those of other employees in similar positions in the same organization. Factors such as skill level, the effort and the responsibility of the role, as well as working conditions are considered. An internal equity study can determine if there is pay equity between like-positions and if all roles in the organization are governed by the same compensation guidelines. Usually each role is assigned a pay range with corresponding criteria that outlines how to determine where an employee should be placed in the range.

An agency may employ a number of social workers to work with similar client groups. By reviewing the salary of each employee and comparing it with others in the same role, you will be able to determine if internal equity exists. This does not mean that all employees are paid

the same; it means that they are paid fairly in relation to other staff in the same role. Differences in salary may be based on education, experience, years of service, or responsibility level.

External equity
External equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations. External equity exists when an organization's pay rates are at least equal to the average rates in the organizations market or sector. Employers want to ensure that they are able to pay what is necessary to find, keep and motivate an adequate number of qualified employees. Creating a compensation structure that starts with competitive base pay is critical. Employees also compare their roles and pay to roles and pay in other organizations. Unfortunately they do not always compare with similar types of organizations or even in the same sector. Generally, employees consider much more than base pay in determining external equity. For some more emphasis may be placed on employee benefits, job security, physical work environment or the opportunity for advancement in deciding if external equity exists. The use of salary surveys is critical in your ability to determine if your compensation and benefits are comparable to similar roles in other organizations. It is important to ensure that the key responsibilities and goals of the roles being compared are similar; as is the sector the organization is aligned with.

A number of nonprofit organizations have tried to address quality of life concerns by only requiring full-time employees to work a 35-hour week, while many other organizations require their employees to work 37.5 or even 40 hours per week.

It is important that if the base pay for a specific role from group one was to be compared to the same role in group two, that the difference in hours is understood and accounted for. While the difference in hours may seem small, if a person who worked a 37.5 hour week made $40,000/year, they would be making $20.51/hour. If the person working the 35-hour week were also being paid $20.51/hour, their annual salary would only be $37,328 per year. This could seem inequitable unless the difference in hours was clear.

What is a Pay Commission? The Pay Commission is an administrative system/mechanism that the government of India set up in 1956 to determine the salaries of government employees. The First Pay Commission was established in 1956, and since then, every decade has seen the birth of a commission that decides the wages of government employees for a particular time-frame.

The second Pay Commission was set up in August 1957 and gave its report in two years. The third Pay Commission, set up in April 1970, submitted its report in March 1973. The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and this year. The Union Cabinet, under the stewardship of Prime Minister Manmohan Singh, approved the setting up of the 6th Pay Commission to revise the payscales of central government employees in July 2006. The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra Dholakia, J S Mathur and Sushama Nath as its other members. The Pay Commission was supposed to submit its report in 18 months.

DEFINATION OF THE TERM PERFORMANCE APPRAISAL Afford and Beatty: - performance appraisal is the evaluation or appraisal of the relative worth to the company of mans services on his job. Performance appraisal is a formal structured system of measuring and evaluating an employees job related behaviors and outcomes to discover how and why the employee is presently performing on the job and how the employee can perform more effectively in the future so that the employee, organization and society all benefits. METHODS OF PERFORMANCE APPRAISAL

The performance appraisal methods may be classified into three categories, as shown in Figure. PERFORMANCE APPRAISAL METHODS

1. INDIVIDUAL EVALUTION METHODS OTHER METHODS 1.Confidential report 2.Easy evaluation 9. Ranking 10. Paired comparison 11. Forced distribution

2.MULTIPAL-PERSON EVOLUTION METHODS 12. Group Appraisal 13. HRA 14. Field review.

3.Critical incidents 4.Checklists 5.Graphic rating scale 6.Behaviorally anchored rating scales 7.Forces Choice method 8.MBO
methods of performance appraisal

Performance appraisal methods include 11 methods as follows:

1. Critical incident method The critical incidents for performance appraisal is a method in which the manager writes down positive and negative performance behavior of employees throughout the performance period 2. Weighted checklist This method describe a performance appraisal method where rater familiar with the jobs being evaluated prepared a large list of descriptive statements about effective and ineffective behavior on jobs 3. Paired comparison analysis Paired comparison analysis is a good way of weighing up the relative importance of options. A range of plausible options is listed. Each option is compared against each of the other options. The results are tallied and the option with the highest score is the preferred option. 4. Graphic rating scales The Rating Scale is a form on which the manager simply checks off the employees level of performance. This is the oldest and most widely method used for performance appraisal. 5. Essay Evaluation This method asked managers / supervisors to describe strengths and weaknesses of an employees behavior. Essay evaluation is a non-quantitative technique This method usually use with the graphic rating scale method. 6. Behaviorally anchored rating scales This method used to describe a performance rating that focused on specific behaviors or sets as indicators of effective or ineffective performance. It is a combination of the rating scale and critical incident techniques of employee performance evaluation. 7. Performance ranking method Ranking is a performance appraisal method that is used to evaluate employee performance from best to worst.

Manager will compare an employee to another employee, rather than comparing each one to a standard measurement. 8. Management By Objectives (MBO) MBO is a process in which managers / employees set objectives for the employee, periodically evaluate the performance, and reward according to the result. MBO focuses attention on what must be accomplished (goals) rather than how it is to be accomplished (methods) 9. 360 degree performance appraisal 360 Degree Feedback is a system or process in which employees receive confidential, anonymous feedback from the people who work around them. 10.Forced ranking (forced distribution) Forced ranking is a method of performance appraisal to rank employee but in order of forced distribution. For example, the distribution requested with 10 or 20 percent in the top category, 70 or 80 percent in the middle, and 10 percent in the bottom. 11. Behavioral Observation Scales Behavioral Observation Scales is frequency rating of critical incidents that worker has performed.

wages and salaries include the values of any social contributions, income taxes, etc., payable by the employeeeven if they are actually withheld by the employer for administrative convenience or other reasons and paid directly to social insurance schemes, tax authorities, etc., on behalf of the employee. Wages and salaries may be paid in various ways, including goods or services provided to employees for remuneration in kind instead of, or in addition to, remuneration in cash (SNA 7.32-7.42).[1] Wages and salaries in cash consist of wages or salaries payable at regular weekly, monthly or other intervals, including payments by results and piecework payments; plus allowances such as those for working overtime; plus amounts paid to employees away from work for short

periods (e.g., on holiday); plus ad hoc bonuses and similar payments; plus commissions, gratuities and tips received by employees. Wages and salaries in kind consist of remuneration in the form of goods and/or services that are not necessary for work and can be used by employees in their own time, and at their own discretion, for the satisfaction of their own needs or wants or those of other members of their households.
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