COMPENSATION

Economic compensation constitutes a segment of total reward

system in an organization.
Compensation management is the practice of the organization that
involves giving monetary as well as non monetary rewards to the
employees, in order to compensate for the time they allocate to
their job.
One of the most significant benefits associated with compensation
management is that it helps the organization achieve employee
satisfaction, stabilizes labor turnover, attracts & retains talented
employees and turn the organization into a hub of talent.
WAGES & SALARY
Wage is usually referred as the worth of a job, while salary is the
worth of an individual, thereby suggesting that wages are fixed
while salary is negotiable.
In popular terms, wage refers to hourly payment while salaries are
paid by month. Though wages can be paid by the end of the week
or month, their calculation is done by hours, so they imply no long
term guarantee for employment.
On the other hand, salaries can be yearly, monthly or bi monthly,
the implicit assumption is that job can last for a long time.
ESTABLISHING PAY RATES
The process of establishing pay rates consists of five steps:
Conduct a salary survey of what other employers are paying for
comparable jobs (to help ensure external equity – compares a pay
package to others outside the organization)
Determine the worth of each job in the organization through job
evaluation (to ensure internal equity – is how one employee’s pay
package compares to others inside the same organization.
Group similar jobs into pay grades
Price each pay grade by using wage curves.
Fine tune pay rates.
Step 1 : Conduct a salary survey
 a salary survey is a tool specifically for remuneration specialists
and mangers to define a fair & competitive salary for the
employees of a company.
Employers use salary surveys in three ways:
First, They use survey data to price benchmark jobs. Benchmark
jobs are the anchor jobs around which they slot their other jobs,
based on each job’s relative worth to the firm.
 second, employers typically price 20% or more of their positions
directly in the market place, based on a formal or informal survey
of what comparable firms are paying for comparable jobs.
Third, surveys also collect data on benefits like insurance, sick
leave and vacations to provide a basis for decisions regarding
employee benefits.
Salary surveys can be formal or informal. Informal phone or
internet surveys are good for checking specific issues, such as when
a bank wants to confirm the salary at which to advertise a newly
open job.
Some large employers can afford to send out their own formal
surveys to collect compensation information from other employers.
Most of these ask about things like number of employees, overtime
policies, starting salaries, & paid vacations.
Many employers use surveys published by consulting firms,
professional associations, or government agencies. Private
consulting or executive recruiting companies also publish data
covering compensation for top & middle management and
members of board of directors.
Professional associations like Association of Engineers, All India
Management Association publish surveys of compensation practices
among members of their associations.
Internet options also makes it easy for anyone to access published
compensation survey information.
The Pay Check India project is part of the world wide, web based
research initiative on wage transparency called the Wage
Indicator project. In India, the pay check project is anchored by a
research team from IIM Ahmedabad in collaboration with the
University of Amsterdam.
 Step :2 job evaluation
Job evaluation aims to determine a job’s relative worth. The job
evaluation is a formal & systematic comparison of jobs to
determine the worth of one job relative to another.
Job evaluation eventually results in a wage or salary structure or
hierarchy.
The basic principle is: the jobs that require greater qualifications,
more responsibilities, and more complex job duties should receive
more pay than jobs with lesser requirements.
There are four major methods of job evaluation:
Ranking method – this is perhaps the simplest method of job
evaluation. Here the total or whole job is ranked against other jobs
on the basis of difficulty level.
No measurable points or score values are assigned. It is simply
arranging the jobs in an hierarchy.
This method is useful in small organizations with relatively flat
structures. However, one of the major drawbacks of any ranking is
the relative position and distance of one job compared to others.
Job classification – mostly used by government agencies &
departments, job classification consists of first identifying classes,
categories or grades.
After this their level of difficulty identified by defining its
specifications and then individual jobs are classified in these
categories /grades.
Compensation levels for each grades are allocated and
employees working in various departments may end up getting the
same compensation level as long as they belong to the same
grade.
Like the ranking method, in this system job as a whole is taken into
consideration with little or no attention to its component parts.
Point system – the method of job evaluation consists of first
developing key compensable factors on which each job must be
evaluated. The collection of these key factors is called manual or
yardsticks.
These manuals can be developed on the basis of organization’s
own experience or those developed by industry wide organization.
Each of these key compensable factors have a scale value which defines
the degree of presence of that factor. Each job is rated on these key
factors and a value is assigned.
At the end of this exercise the values at each factor are added to get a
total score which is then converted into a compensation level.
Point system is useful method of job evaluation. However, care must be
taken to ensure that the manual is as all inclusive as possible so as to
avoid possibilities of leaving out important factors or their sub
components.
It provides flexibility, once the manual is developed, job evaluation
become simple & easy.
Factor comparison system – this method is complicated and
expensive. It required the consultation of experts and specialists for
comparison and appraisal of jobs.
Unlike point system a few compensable factors re chosen based on
job analysis. These factors are those that are found to some
degree in all the jobs.
The weightages of these factors are based on pooled judgments
of a group of experts on key jobs and not as arbitrary as in point
system.
The current rate of pay is used as a basis for developing
weightages for each of the elements of compensable factors for all
key jobs.
When all the key jobs are thus analyzed, weightages for the
elements are developed by taking an average on the key jobs.
Thus the money value of one factor in one job is compared to the
money value of the same factor in other job.
This is what makes this method more acceptable because it is
based on the established compensation structure.
 Step 3 :group similar jobs into pay grades
Once the committee has used job evaluation to determine the relative
worth of each job, however it will usually want to first group jobs into
pay grades.
Otherwise, It would be difficult to administer especially for a large
employer, since there might be different pay rates for hundreds or even
thousands of jobs.
Therefore, the committee will probably group similar jobs into grades
for pay purposes. So instead of having to deal with hundreds of pay
rates ,it might only have to focus on 10 or 12.
A pay grade is comprised of jobs is comprised of jobs of
approximately equal difficulty or importance as established by job
evaluation.
If the committee used the point method, then the pay grade
consists of jobs falling within a range of points. With the ranking
method, the grade consist of all jobs that fall within two or three
ranks.
Step 4 : price each pay grade – wage curves
The next step is to assign pay rates to pay grades with the help of
wage curves.
The wage curve shows the pay rates currently paid for jobs in each pay
grade, relative to the points or rankings assigned to each job or grade
by the job evaluation.
The purpose of the wage curve is to show the relationships between1)
the value of the job as determined by one of the job evaluation method
and 2) the current average pay rates for your grades.
Step 5:fine tune pay rates
Most employers do not pay just one rate for all jobs in a particular
pay grade. Instead, they develop vertical pay ranges for each of
the pay grades. These pay ranges often appear as vertical boxes
within each grade, showing minimum, maximum and midpoint pay
rates for that grade, known as wage structure.
WAGE & SALARY ADMINISTRATION
Is a collection of practices & procedures used for planning &
distributing company wide compensation programs for employees.
These practices include employees at all levels and are usually
handled by the account department of a company.
Steps involved in determining wage & salary rates are:
Performing job analysis
Wage surveys
Analysis of relevant organizational problems in forming wage
&salary structure.
Framing rules of wage administration
Explaining these to employees
Assigning grades and
Price to each job & paying the guaranteed wage.
Factors affecting wage & salary administration includes the
following:
External factors are follows:
Demand &supply –the labor market conditions or demand &
supply forces operate at the national & local levels determine
organizational wage structure.
Cost of living – the wage rates are directly influenced by cost of
living of a place. The workers will accept a wage which may
ensure them a minimum standard of living.
Trade unions bargaining power – stronger the trade union higher
will be the wage rates.
Government legislation – to improve the working conditions of
workers, government may pass a legislation for fixing minimum
wages of workers. This may ensure them a minimum level of living.
Psychological & social factors – management should take into
consideration the psychological needs of the employees while
fixing the wage rates so that the employees take pride in their
work. Sociologically & ethically, the employees want that the wage
system should be equitable, just & fair.
Economy – also has its impact on wage & salary fixation. A
depressed economy will probably increase the labor supply, this in
turn, should lower the going wage rate.
Technological development – with the rapid growth of industries,
there is a shortage of skilled resources. The technological
developments have been affecting skills levels at faster rates.
Prevailing market rates – the wage rates paid in the industry or
other concerns at the same place will form a base for fixing wage
rates.
Internal factors are follows:
Ability to pay – of an organization will influence wage rates to
be paid.
Job requirements – basic wages depend largely on the difficulty
level, physical & mental effort required in a particular job. The
relative worth of a job can be estimated through job evaluation.
Management strategy – where the strategy is to achieve rapid
growth, remuneration should be higher than what competitors pay.
Several employee related factors also affect remuneration:
Performance or productivity is always rewarded with a pay
increase.
Seniority
Experience
potential
STATUTORY & NON STATUTORY BENEFITS
•Statutory benefits are labor advantages implemented by the
government of a country through mandatory contributions, deductions &
insurances. Often times both the employer and the employee are
required to contribute such benefits.
•Statutory benefits & contribution requirements vary by country and
sometimes by city.
•There are some statutory benefits which must be provided to employees
such as:
Social security - provides benefits to employees when they are older
than 62.
Medicare
Workers compensation – provides a benefit to employees who are
injured on the job.
Statutory disability – provides an income replacement for those
employees who suffer an accident or sickness off the job.
Federal & state unemployment insurance
The most common non statutory employee benefits include:
Health insurance – provides reimbursement to employees for
medical expenses incurred by them or their family members.
 dental insurance – provides reimbursement to employees for
dental expenses incurred by them or their family members.
Group life insurance – provides a death benefit to an employee’s
beneficiary in the event of an employee’s death.
Group long term disability insurance – provides reimbursement to an
employee who becomes disabled.
Group short term disability insurance – provides supplemental
reimbursement above the statutory disability payment to an employee
who becomes disabled.
Vision plan – provides reimbursement for eye exams and
glasses/contact lenses.
Section 125 plan – medical reimbursement, dependant care,
transportation
Pension plan
INSURANCE BENEFITS
Most employers also provide a number of required or voluntary
insurance benefits such as worker’s compensation and health
insurance.
Workers compensation –laws aims to provide sure, prompt income
& medical benefits to work related accident victims or their
dependents regardless of fault.
Every state has its own worker’s compensation law & commission,
and some run their own insurance programs.
However, most require employers to carry worker’s compensation
insurance with private, state approved insurance companies.
Neither the state nor the federal government contributes any funds
for workers’ compensation.
Hospitalization, health & disability insurance – helps protect
employees against hospitalization costs and the loss of income
arising from off the job accidents or illness.
Many employers purchase insurance from life insurance companies,
casualty insurance companies etc.
Others contract with health maintenance organizations or
preferred provider organizations.
The employer & employee usually both contribute to the plan.
RETIREMENT BENEFITS
Social security – most people assume that social security provides
income only when they are older than 62, but it actually provides
three types of benefits. The familiar retirement benefits provide an
income if you retire at age 62 or thereafter and are assured
under the Social Security Act.
Second are survivor’s or death benefits, these provide monthly
payments to dependents regardless of age at death, again
assuming you are insured under the social security act.
Finally, there are disability payments. These provide monthly
payments to employees who become disabled totally if they meet
certain requirements.
The social security system also administers the Medicare program
which provides health services to people age 65 or older.
Pension plans – are financial programs that provide income to
individuals in their retirement. Pension plans can be classified in
three ways:
Contributory versus non contributory plans – the employee
contributes to the contributory pension plan, while the employer
makes all contributions to non contributory plans.
Qualified versus non qualified plans – employers derive tax
benefits from contributing to qualified pension plan, non qualified
pension plans gets less favorable tax treatment.
Defined contribution versus defined benefit plans – defined
contribution pension plans specify what contribution the employee
and/or employer will make to the employee’s retirement or savings
fund.
With a defined benefit plan, the employee knows what his/ her
retirement benefits will be upon retirement.
FLEXIBLE BENEFITS PROGRAMS
Allows employees to choose the benefits they want or need from a
package of programs offered by an employer. Flexible employee
benefit plans may include health insurance, retirement benefits such
as 401 (k) plans, and reimbursement accounts that employees can
use to pay for health or dependent care expenses.
In a flexible benefit plan, employees contribute to the cost of these
benefits through a payroll deduction of their before tax income,
reducing the employer’s contribution.
Flexible benefit plans have become increasingly popular with
employers. Health & child care costs have risen tremendously over
the past several decades.
There are several types of flexible benefit plans, including
cafeteria plans & flexible spending accounts.
The cafeteria approach – is in which the employer gives each
employee a benefits fund budget, and let the person spend it on
the benefits he/she prefers subject to two constraints:
First, the employer must limit the total cost for each employee’s
benefits package. Second, the employee’s benefits plan must
include certain required items –social security, worker’s
compensation, unemployment insurance etc.
Flexible spending accounts (FSA)- is a tax deferred savings
account established by an employer to help employees meet
certain medical and dependent care expenses that are not
covered under the employer’s insurance plan.
FSA allow employees to contribute pre-tax money to an account
set up by their employer.
They can later withdraw these funds tax fee to pay for qualified
health insurance premiums, out of pocket medical costs, day care
provider fees, or private preschool and kindergarten expenses.
ESOPS
An Employee Stock Ownership Plan (ESOPs) is an employee owner
program that provides a company’s workforce with an ownership
interest in the company.
ESOPs is a qualified, tax deductible defined contribution plan in
which employers contribute stock to a trust for eventual use by
employees who retire.
In an ESOP companies provide their employees with stock
ownership often at upfront cost to the employees.
ESOP shares, however are part of employee remuneration for
work performed. Shares are allocated to employees and may be
held in an ESOP trust until the employee retires or leaves the
company.
The shares are then either bought back by the company for
redistribution or voided.
Some corporations are majority employee owned, and are
referred to as employee owned corporation.
Such organizations are similar to worker cooperatives, but unlike
cooperatives, control of the company’s capital is not necessarily
evenly distributed.
Compared to cooperatives, ESOP centered cooperation’s often
allow for company executives to have greater flexibility and
control in governing and managing the cooperation.
QWL
Quality of Work Life (QWL) – refers to the favorableness or un
favorableness of a job environment for the people working in an
organization.
Quality of work life is the quality of relationship between
employees and total working environment.
It represents concern for human dimensions of work and relates to
job satisfaction & organizational development.
The following aspects improve the QWL:
Recognition of work life issues – issues related to work life should
be addressed by the board and other important officials of the
company like why people are not happy, do they need training,
why employee morale is poor and numerous other issues.
Commitment to improvement – QWL can be improved if the staff
is committed to improvement in productivity & performance.
Quality of work life teams – board members should form the
combined team of managers and workers and all the issues and
common themes must be identified.
Training to facilitators - both the leader and staff can assess the
job requirement and decide jointly what type of training is
required to improve the QWL.
Conduct focus groups – formation of focus groups can affect the
QWL and discuss the questions in a positive way.
Analyze information from focus group – after the formation of
focus groups and their discussion on different issues and collection
of information, the information should be analyzed to give right
direction to organizational activities.
Identify & implement improvement opportunities – it is important
to identify & implement improvement opportunities like
communication, recognition, & non monetary compensation.
Flexible work hours – the diverse work force today want
flexibility in their work schedule so that professional & personal life
can be managed together.
Autonomy to work – delegation is an essential element of
organization structure. People want freedom to work in their own
way, in terms of forming teams & making decisions. If they are
allowed to do so, it enhances QWL.
Importance of QWL
Enhance stakeholder relations & credibility – companies that focus
on QWL can communicate their views, policies, & performance on
complex social issues & develop interest among their key
stakeholders like consumers, suppliers, employees etc.
Increase productivity – programs which help employees balance
their work and lives outside the work can improve productivity.
Attraction & retention – QWL strategies attracts & retain efficient
employees, this results in savings for the employer as it avoids the
cost of losing an experienced worker & recruiting someone new.
Reduces absenteeism – companies that have family friendly or
flexible work practices have low absenteeism.
Improve the quality of working lives – minimizing work life role
conflict helps prevent role overload and people have a more
satisfying working life, fulfilling their potential both in paid work &
outside it.
Benefiting families & communities – QWL maintains balance
between work & family.
Job involvement – companies with QWL have employees with high
degree of job involvement. People put their best to the job &
report good performance. They achieve a sense of competence &
match their skills with requirements of the job.
Job satisfaction – job involvement leads to job commitment & job
satisfaction.
Company reputation – many organizations, including
governments, NGOs, investors & the media, consider the quality of
employee experience in the work place when evaluating a
company.