Importance of Compensation

• Remuneration is highly significant because several problems

relating to personnel centre around one element, namely
remuneration. Many employees absent themselves from work
because they feel they are not paid enough, they look for new
prospects because the present emoluments are not attractive
enough to stay on, they agitate, throw stones, use abusive
language, resort to graffiti, turn violent, fall sick because the
present pay is not satisfactory
• Talks on job satisfaction, loyalty, organisation before self are
good for boardroom discussion and for delivering lectures in
classroom, everybody is not like the Japanese who have a
fanatical devotion to work, in our country an average worker
cares only for money. So remuneration must fulfill
expectations and aspirations and exploit employee energies
for the benefit of the organisation.
 Importance of Compensation
• Attractive pay attract, retain and motivate competent people.
The best flock to HLL, Infosys, Citibank, Motorola, Reliance
etc. for their best pay packages
• Retaining competent employees is more difficult than
attracting fresh ones. Longevity of service depends more on
Non Financial Benefits but the role of financial benefits
cannot be ruled out, particularly at the lower levels.
• Employees feel satisfied or dissatisfied with his/her pay – not
so much by the amount but by comparing the benefits with
those enjoyed by others. Comparison provides a feeling of
equity or inequity. There is a feeling of equity when the pay is
equal or more than that received by others in the same
category of jobs. The org’s pay structure must be equitable
and consistent.
 Importance of Compensation
• Employees get motivated to perform better when their past
performance is rewarded adequately. Employees set expectations
about rewards and compensation to be received, if certain levels of
perf. are achieved, these expectations determine goals or levels of
perf. for the future. At some point, the mgmt evaluates and rewards
the employee’s perf. with merit-pay, promotions, NFBs like
recognition, freedom etc. Employees consider and evaluate the
relationship between the perf. and rewards related to that perf., and
then the fairness of the relationship. Then the employee will set new
goals and expectations, based on past experiences within the org.
• If employees see that hard work and superior perf. are recognised and
rewarded, they will expect such relationship to continue in the future
and get them to set higher levels of perf. for themselves, expecting
higher levels of rewards. If employees see little relationship between
perf. and rewards, then they may set minimum goals in order to retain
their jobs, but will not see the need to excel in their positions.
 Importance of Compensation

• Remuneration is the only HR activity which has its impact on all

other functions regarding personnel – job evaluation establishes
satisfactory wage and salary wage differentials – competent people
are attracted to orgs where the pays are attractive – recruitment
and selection are dependent on wages and salaries offered to
prospective employees – performance appraisal is related to
remuneration – union mgmt relations largely depend upon
employee remuneration – IR disputes occur mostly because of
remuneration related issues.
• A rational pay structure prevents overpayment and underpayment
and ultimately controls cost. It also helps in compliance with labour
laws.
• The primary wage policy in any country should be the promotion of
economic development. If ED has been meagre and stunted, one of
the reasons may be failure of the wage policy to contribute properly
to the process of ED.
5 Remuneration and Compensation

• Remuneration is the compensation an employee receives in return for his/her

contribution to the org. Remuneration occupies an important place in the life of
an employee – his/her standard of living, status in the society, motivation,
loyalty and productivity depend upon the remuneration he/she receives. For the
employer, employee remuneration is important because it represents cost of
production. Many battles are fought between employer and employee on issues
relating to wages or bonus. Employee remuneration is a major function of HRM.
HR specialists have a difficult time fixing wage differentials acceptable to
employees and their leaders.
• Compensation is what employees receive in exchange for their contribution to
the org. . Generally, employees offer their services for three types of rewards.
Pay refers to the base wages and salaries employees normally receive. Bonus,
commissions and profit sharing plans are incentives designed to encourage
employees to produce results beyond expectations. Benefits such as insurance,
medical, recreational, retirements etc., represent a more indirect type of
compensation – term compensation is a comprehensive one, including pay,
incentives, benefits offered by employers for hiring the services of employees –
in addition legal formalities that offer physical and financial security to
employees.
 Remuneration of Special Groups

Special groups enjoy two characteristics :

• They tend to be strategically important to the company. If

they do not succeed in their jobs, success for the whole
organisation is in jeopardy

• Their positions tend to have built in conflicts, conflicts that

arises because different factions place incompatible demands
on members of the group
 Remuneration of Special Groups
a. Supervisors : caught between upper mgmt and employees. Must
balance need to achieve org’s objectives, with importance of helping
employees satisfy personal needs. If unsuccessful, either corporate
profits or employee morale suffers. Top mgmt demands higher
production and employees insist on enhanced rewards, reinforcements
and general counseling. The challenge in compensating supervisors
centres on equity. Some incentive has to be provided to make the
supervisor’s job attractive. For many years the strategy was to treat
supervisors like lower-level mgrs, but the existing job evaluation system
sometimes left these supervisors making less money than the top-paid
employees they supervised. This created very less incentive to take on
the extra work load.
• The most popular method is to key the base salary to some amount
exceeding the top paid subordinate in the unit (5 to 30 % - typical size of
the differential)
• Another method is to simply pay supervisor for scheduled overtime
• Another popular trend is the increased use of variable pay.
 Remuneration of Special Groups

b. Scientists and Engineers : compensation is given for their

special scientific or intellectual training. Consider the case of
a fresh electrical engineer who has joined a co. working on
electrical engineering projects. For the first few years the
freshman’s new knowledge will be great resource for the co.
where new applications of the latest theories are a primary
objective. Gradually though this engineer’s knowledge
becomes obsolete, and team leaders look for new graduates
for fresh ideas – for these engineers and scientists early years
bring larger than average increases, after 10 years increases
drop below average and may not be any after that.
 Remuneration of Special Groups
• Partly because salary plateaus arise they make career changes
such as moving to mgmt or temporarily leaving to update their
technical knowledge. Many cos. now provide dual ladders for
progressing in an org. The managerial ladder ascends through
increasing responsibilities for supervision and direction of
people. The professional track ascends through increasing
contributions of a professional nature that do not mainly entail
the supervision of employees. They have at some point in the
careers the opportunity to consider a mgmt track or continue
along the scientific track
• Another problem is that of equity. This entails the use of
maturity curves. Curves are steep for the first 5 to 7 years and
then rise more gradually as obsolescence sets in. High
performers begin with higher salaries and the differential
continues to broaden over the first few years.
Remuneration of Special Groups
Remuneration of Special Groups
 Remuneration of Special Groups

c. Sales Force : Often goes for extended periods in the field

with little supervision. Challenge is to stay motivated and
continue making sales calls even in the face of limited
contact or scrutiny from managers. They span an all
important boundary between the org and consumers of the
org’s goods and services. They must be sensitive to changing
consumer needs and tastes and provide rapid feedback to
appropriate deptts. The role of staff with high initiative and
the ability to work under low supervision over an extended
period of time increases. Standard compensation system is
not designed for this type of job
 Remuneration of Special Groups

Factors influencing the design of sales compensation package are

1. People who enter the sales profession
2. Organisational strategy
3. Market maturity
4. Competitor Practices
5. Size of the company
6. Economic environment
7. Product to be sold