75978038 compensation-management

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COMPENSATION MANAGEMENT

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INTRODUCTION

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• INTRODUCTION :• The term compensation as a substitute word for wages and salaries,

is of recent origin. Wages is now considered as a cost factor.Therefore, strategic management of wages and salaries is veryimportant for organisations.

• It has become imperative for organisations to balance the cost ofcompensation and employee motivation (for retention) to survivein a competitive world.

• Employee compensation is a better term than employee benefits orwages or salaries. What the employee provides the employer is alabor service, usually known as work. This labor service consists ofmany different kinds of employee behavior, such as showing upregularly and on time, carrying out tasks dependently, cooperativewith others and making useful suggestions.

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com• INTRODUCTION :

• The term compensation as a substitute word for wages and salaries,is of recent origin. Wages is now considered as a cost factor.Therefore, strategic management of wages and salaries is veryimportant for organisations.

• It has become imperative for organisations to balance the cost ofcompensation and employee motivation (for retention) to survivein a competitive world.

• Employee compensation is a better term than employee benefits orwages or salaries. What the employee provides the employer is alabor service, usually known as work. This labor service consists ofmany different kinds of employee behavior, such as showing upregularly and on time, carrying out tasks dependently, cooperativewith others and making useful suggestions.

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• Pay or compensation represents an exchange between the employee andthe organisation. Each gives something in return for something else. Inthe past, the compensation issue was often confidential and governed byindividual employer’s preference and choice.

• However, in today’s competitive world, compensation issues are moretransparent.

• Different scholars in different countries, have defined the worldcompensation from different perspectives. Globally, almost every countryviews compensation as a measure of justice. Also, some countries(particularly developed ones) consider compensation as a means ofprotection against potential job loss.

• Compensation should be fair, irrespective of economic consideration.Many scholars believe that compensation is the outcome of productivity.In India, right from Vedic Age, the volume of work and the time requiredto perform the work were considered to decide compensation.

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com• Pay or compensation represents an exchange between the employee and

the organisation. Each gives something in return for something else. Inthe past, the compensation issue was often confidential and governed byindividual employer’s preference and choice.

• However, in today’s competitive world, compensation issues are moretransparent.

• Different scholars in different countries, have defined the worldcompensation from different perspectives. Globally, almost every countryviews compensation as a measure of justice. Also, some countries(particularly developed ones) consider compensation as a means ofprotection against potential job loss.

• Compensation should be fair, irrespective of economic consideration.Many scholars believe that compensation is the outcome of productivity.In India, right from Vedic Age, the volume of work and the time requiredto perform the work were considered to decide compensation.

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• In Europe, the Church advocated the principles of justwage or compensation. The word compensation maybe defined as all forms of financial returns, tangible;services and benefits that an employee receives inhis/her tenure of employment.

• The modern definition of compensation, however,considers both intrinsic and extrinsic components ofcompensation. While extrinsic compensation coversboth monetary and non-monetary rewards, intrinsiccompensation covers both monetary and non-monetary rewards, intrinsic compensation reflects theemployees’ mental satisfaction with their jobaccomplishments.

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com• In Europe, the Church advocated the principles of just

wage or compensation. The word compensation maybe defined as all forms of financial returns, tangible;services and benefits that an employee receives inhis/her tenure of employment.

• The modern definition of compensation, however,considers both intrinsic and extrinsic components ofcompensation. While extrinsic compensation coversboth monetary and non-monetary rewards, intrinsiccompensation covers both monetary and non-monetary rewards, intrinsic compensation reflects theemployees’ mental satisfaction with their jobaccomplishments.

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• Wages and Compensation :• A wage is a basic compensation for labor and for Labor per

period of time referred to as the wage rate. Otherfrequently used terms for wages are payment per unit oftime (typically an hour or year) Total compensationrepresents earnings and other benefits for labor.

• Wage Income represents total compensation and unearnedincome. Wages are also referred to as economic rent, whichis the figure of total compensation, after reducing theopportunity cost. Opportunity cost represents the cost ofsomething in terms of an opportunity forgone (and thebenefits which could be received from that opportunity) orthe most valuable forgone alternative.

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com• Wages and Compensation :

• A wage is a basic compensation for labor and for Labor perperiod of time referred to as the wage rate. Otherfrequently used terms for wages are payment per unit oftime (typically an hour or year) Total compensationrepresents earnings and other benefits for labor.

• Wage Income represents total compensation and unearnedincome. Wages are also referred to as economic rent, whichis the figure of total compensation, after reducing theopportunity cost. Opportunity cost represents the cost ofsomething in terms of an opportunity forgone (and thebenefits which could be received from that opportunity) orthe most valuable forgone alternative.

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• The term ‘wages’ has emerged from French Word‘wagier or gagier’ meaning to pledge or promise. Theterm wage is thus meant ;to indicate making a promisein monetary form.

• Marxian economics suggests that the payment ofwages to workers should be based on the optimalallocation of cooperative human labor. Marxists viewthat workers’ participation in the production processcan be oppressive, irrational and exploitative on theone hand and can be beneficial to the other. Thus, itbelieves that the most desirable form of labororganisation in the workplace is one where workersmanage themselves collectively, and elect managers.

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com• The term ‘wages’ has emerged from French Word

‘wagier or gagier’ meaning to pledge or promise. Theterm wage is thus meant ;to indicate making a promisein monetary form.

• Marxian economics suggests that the payment ofwages to workers should be based on the optimalallocation of cooperative human labor. Marxists viewthat workers’ participation in the production processcan be oppressive, irrational and exploitative on theone hand and can be beneficial to the other. Thus, itbelieves that the most desirable form of labororganisation in the workplace is one where workersmanage themselves collectively, and elect managers.

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COMPENSATION MANAGEMENT• From financial perspective, wages are defined as the cash paid for some

specified quantity of labor, in contrast with salaries. Wages are paid basedon wage rate (based on units of time) while salaries are paid periodicallywithout reference to a specified number of hours worked. Given anestablished job description , wages can often be negotiated by workersthrough collective bargaining.

• Differences between Wages and Compensation :• The term labor cost is best understood from the International Labor

Organisation (ILO) Geneva. Labor cost is the cost incurred by the employerin the employment of labor. This also includes payments in respect oftime paid for but not worked, bonuses, gratuities, the cost of food, drinkand other payments in kind, the cost of workers’ housing borne byemployers, employers’ social security expenditures, the cost to theemployer for vocational training, welfare services, miscellaneous items,such as transport of workers, work clothes and cost of recruitment andtaxes paid by the employers on employment.

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com• From financial perspective, wages are defined as the cash paid for some

specified quantity of labor, in contrast with salaries. Wages are paid basedon wage rate (based on units of time) while salaries are paid periodicallywithout reference to a specified number of hours worked. Given anestablished job description , wages can often be negotiated by workersthrough collective bargaining.

• Differences between Wages and Compensation :• The term labor cost is best understood from the International Labor

Organisation (ILO) Geneva. Labor cost is the cost incurred by the employerin the employment of labor. This also includes payments in respect oftime paid for but not worked, bonuses, gratuities, the cost of food, drinkand other payments in kind, the cost of workers’ housing borne byemployers, employers’ social security expenditures, the cost to theemployer for vocational training, welfare services, miscellaneous items,such as transport of workers, work clothes and cost of recruitment andtaxes paid by the employers on employment.

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• From the employers’ perspective, therefore, thecompensation consists of all payments (in kind or in cash)and all contributions to employees’ social security, pension,insurance etc.

• Labor cost and the compensation of employees are thusclosely-related concepts, with many common elements.The major part of labor cost comprises compensation ofemployees. However, definition of labor cost and thecompensation of employees differ from country to country.For example, some items of labor cost such as vocationaltraining are borne not by employers but by respectivegovernment s. In India, the Central Board for Workers’Training and the Regional Labor Institutes provide eitherfree or subsidized training for industrial workers.

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com• From the employers’ perspective, therefore, the

compensation consists of all payments (in kind or in cash)and all contributions to employees’ social security, pension,insurance etc.

• Labor cost and the compensation of employees are thusclosely-related concepts, with many common elements.The major part of labor cost comprises compensation ofemployees. However, definition of labor cost and thecompensation of employees differ from country to country.For example, some items of labor cost such as vocationaltraining are borne not by employers but by respectivegovernment s. In India, the Central Board for Workers’Training and the Regional Labor Institutes provide eitherfree or subsidized training for industrial workers.

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• The State’s contributions to wage-related social security schemesare not included in the cost of compensation for employers. Insome countries, payroll taxes or ;employment taxes are consideredas labor costs.

• In Human Resource Management we consider the term from abroader perspective, that is, the strategic use of wages paid toemployees. Some organisations refer to use the term rewardsinstead of wages or compensation.

• Compensation or wage structure in a given case should take intoaccount industrial adjudication as well as considerations of rightand wrong and fairness and unfairness. Given social conscience andthe welfare policy of the state, collective bargaining is now the mostdynamic form of negotiation to decide wage structure in aparticular organisation.

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com• The State’s contributions to wage-related social security schemes

are not included in the cost of compensation for employers. Insome countries, payroll taxes or ;employment taxes are consideredas labor costs.

• In Human Resource Management we consider the term from abroader perspective, that is, the strategic use of wages paid toemployees. Some organisations refer to use the term rewardsinstead of wages or compensation.

• Compensation or wage structure in a given case should take intoaccount industrial adjudication as well as considerations of rightand wrong and fairness and unfairness. Given social conscience andthe welfare policy of the state, collective bargaining is now the mostdynamic form of negotiation to decide wage structure in aparticular organisation.

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• Wage issues are no longer purely mathematical issues.It was with this perspective that the framers of theConstitution drew up Article 43 (part of the directiveprinciples of State Policy) which states that “The Stateshall Endeavour to secure, by suitable legislation oreconomic organisation or in any other way, to allworkers – agriculture, industrial or otherwise – work , aliving wage, conditions of work ensuring a decentstandard of life and full employment of leisure andsocial and cultural opportunities. “ The declaration ineffect, assured labor that where they were not able tosecure a living wage for themselves, the government,through legislation or means will come to their aid.

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com• Wage issues are no longer purely mathematical issues.

It was with this perspective that the framers of theConstitution drew up Article 43 (part of the directiveprinciples of State Policy) which states that “The Stateshall Endeavour to secure, by suitable legislation oreconomic organisation or in any other way, to allworkers – agriculture, industrial or otherwise – work , aliving wage, conditions of work ensuring a decentstandard of life and full employment of leisure andsocial and cultural opportunities. “ The declaration ineffect, assured labor that where they were not able tosecure a living wage for themselves, the government,through legislation or means will come to their aid.

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COMPENSATION MANAGEMENT• Two aspects of the State’s role prevent employers from taking undue

advantage of workers-strong bargaining strength and direct participationof the state in the economic life of the nation.

• Wage Components :• Although the term ‘wage’ is an encompassing and includes any form of

financial support and benefits , in a narrower sense wages are the pricepaid for the services of labor.

• Broadly, there are two wage components – the base or basic wages andother allowances. The basic wage is the remuneration, by way of basicsalary and allowances which are paid or payable to an employee in termsof the contract of employment` for the work done.

• Allowances are paid in addition to the basic wage to ensure that the valueof basic wage to ensure that the value of basic wages does not fall over aperiod of time. Some allowances are statutory , while others arevoluntary.

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com• Two aspects of the State’s role prevent employers from taking undue

advantage of workers-strong bargaining strength and direct participationof the state in the economic life of the nation.

• Wage Components :• Although the term ‘wage’ is an encompassing and includes any form of

financial support and benefits , in a narrower sense wages are the pricepaid for the services of labor.

• Broadly, there are two wage components – the base or basic wages andother allowances. The basic wage is the remuneration, by way of basicsalary and allowances which are paid or payable to an employee in termsof the contract of employment` for the work done.

• Allowances are paid in addition to the basic wage to ensure that the valueof basic wage to ensure that the value of basic wages does not fall over aperiod of time. Some allowances are statutory , while others arevoluntary.

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• Most organisations pay allowances such asholiday pay, overtime pay, bonus and socialsecurity benefits.

• Under Sec. 2(m) wages includes ‘Wages for leaveperiod, holiday pay, overtime pay, bonus,attendance bonus etc. Any award of settlementand production bonus if paid, constitutes wages.But under Payment of Wages Act, 1948‘Retrenchment compensation , payment in lieu ofnotice and gratuity payable on dischargeconstitute wages.

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com• Most organisations pay allowances such as

holiday pay, overtime pay, bonus and socialsecurity benefits.

• Under Sec. 2(m) wages includes ‘Wages for leaveperiod, holiday pay, overtime pay, bonus,attendance bonus etc. Any award of settlementand production bonus if paid, constitutes wages.But under Payment of Wages Act, 1948‘Retrenchment compensation , payment in lieu ofnotice and gratuity payable on dischargeconstitute wages.

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COMPENSATION MANAGEMENT• The following types of remunerations are excluded from the purview of

wages :-• Bonus or other payments under a profit-sharing scheme, which do not

form part of the contract of employment.• Value of any house accommodation, supply of light, water, medical

attendance.• Any sum paid to defray special expenses entailed by the nature of the

employment of a workmen.• Any contribution to Pension, Provident Fund or a scheme of social

security and insurance benefits.• Any other amenity or service excluded from the computation of wages by

a general or special order of an appropriate governmental authority.• A wage level is an average of the rates paid for the jobs of an

organisation., an industry , a region or a nation. A wage structure is ahierarchy of jobs to which wage rates have been attached.

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com• The following types of remunerations are excluded from the purview of

wages :-• Bonus or other payments under a profit-sharing scheme, which do not

form part of the contract of employment.• Value of any house accommodation, supply of light, water, medical

attendance.• Any sum paid to defray special expenses entailed by the nature of the

employment of a workmen.• Any contribution to Pension, Provident Fund or a scheme of social

security and insurance benefits.• Any other amenity or service excluded from the computation of wages by

a general or special order of an appropriate governmental authority.• A wage level is an average of the rates paid for the jobs of an

organisation., an industry , a region or a nation. A wage structure is ahierarchy of jobs to which wage rates have been attached.

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• Objectives of Compensation :• The objectives of compensation or wages can be classified

under four broad categories – equity, efficiency, macro-economic stability and optimum allocation of labor.

• Equity : The first category is equity, which may take severalforms. It includes income distribution through narrowing ofinequalities, increasing the wages of the lowest paidemployees, protecting real wages (purchasing power ) and theconcept of equal pay for work of equal value. Compensationmanagement strives for internal and external equity.

• Internal equity requires that pay be related to the relativeworth of a job so that similar jobs get similar pay.

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• Objectives of Compensation :• The objectives of compensation or wages can be classified

under four broad categories – equity, efficiency, macro-economic stability and optimum allocation of labor.

• Equity : The first category is equity, which may take severalforms. It includes income distribution through narrowing ofinequalities, increasing the wages of the lowest paidemployees, protecting real wages (purchasing power ) and theconcept of equal pay for work of equal value. Compensationmanagement strives for internal and external equity.

• Internal equity requires that pay be related to the relativeworth of a job so that similar jobs get similar pay.

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• Efficiency : It is often closely related to equity, because twoconcepts are not antithetical. The objectives of efficiency arereflected in attempts to link a part of wages to productivity orprofit, group or individual performance acquisition andapplication of skills and so on.

• Macro-economic stability – It can be achieved through highemployment levels and low inflation. For instance, aninordinately high minimum wage would have an adverseimpact on levels of employment.

• Efficient allocation of labor : The efficient allocation of laborin the labor market implies that employees will move towherever they receive a net gain. Such movement may be

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com• Efficiency : It is often closely related to equity, because two

concepts are not antithetical. The objectives of efficiency arereflected in attempts to link a part of wages to productivity orprofit, group or individual performance acquisition andapplication of skills and so on.

• Macro-economic stability – It can be achieved through highemployment levels and low inflation. For instance, aninordinately high minimum wage would have an adverseimpact on levels of employment.

• Efficient allocation of labor : The efficient allocation of laborin the labor market implies that employees will move towherever they receive a net gain. Such movement may be

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• From one geographical location to another or from one job toanother (within or outside an enterprise). The provision oravailability of financial incentives causes such movement. Forexample, workers may move from a labor surplus or low-wage area to a high wage area. They may acquire new skills tobenefit from the higher wages paid for skills.

• When an employer’s wages are below market rates, employeeturnover increases. When it is above market rates, thenemployer attracts job applicants.

• When employees move from declining to growth industries,an efficient allocation of labor due to structural changes takeplace.

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com• From one geographical location to another or from one job to

another (within or outside an enterprise). The provision oravailability of financial incentives causes such movement. Forexample, workers may move from a labor surplus or low-wage area to a high wage area. They may acquire new skills tobenefit from the higher wages paid for skills.

• When an employer’s wages are below market rates, employeeturnover increases. When it is above market rates, thenemployer attracts job applicants.

• When employees move from declining to growth industries,an efficient allocation of labor due to structural changes takeplace.

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• Other Objectives of Compensation :

• Acquire Qualified Personnel : Compensation needs to behigh enough to attract applicants. Pay levels must respondto the supply and demand of workers in the labor marketsince employers compete for workers. Premium wages aresometimes needed to attract applicants already working forothers.

• Retain Current Employees : Employees may quit whencompensation levels are not competitive, resulting in highturnover.

• Reward Desired Behavior : Pay should reinforce desired

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• Other Objectives of Compensation :

• Acquire Qualified Personnel : Compensation needs to behigh enough to attract applicants. Pay levels must respondto the supply and demand of workers in the labor marketsince employers compete for workers. Premium wages aresometimes needed to attract applicants already working forothers.

• Retain Current Employees : Employees may quit whencompensation levels are not competitive, resulting in highturnover.

• Reward Desired Behavior : Pay should reinforce desired

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• Behaviors and act as an incentive for such behavior to occurin the future. Effective compensation plans rewardperformance, loyalty, experience, responsibility and otherbehaviors.

• Control Costs : A rational compensation system helps anorganisation obtain and retain workers at a reasonable cost.With effective compensation management, workers mightbe over-paid or under-paid.

• Comply with Legal Regulations : A sound wage and salarysystem considers the legal challenges imposed by theGovernment and ensures the employer’s compliance.

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• Behaviors and act as an incentive for such behavior to occurin the future. Effective compensation plans rewardperformance, loyalty, experience, responsibility and otherbehaviors.

• Control Costs : A rational compensation system helps anorganisation obtain and retain workers at a reasonable cost.With effective compensation management, workers mightbe over-paid or under-paid.

• Comply with Legal Regulations : A sound wage and salarysystem considers the legal challenges imposed by theGovernment and ensures the employer’s compliance.

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• Facilitate Understanding : The compensation managementsystem should be easily understood by human resourcespecialists, operating managers and employees.

• Further Administrative Efficiency : Wage and salaryprogrammes should be so designed that they can be managedefficiently.

• Principles of Compensation Formulation : The main factorsaffecting wage or compensation levels within an organisationare – external relativities, salary and individual worth.

• External relativities – Market rate as affected by supply,demand and general movements in pay levels.

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• Facilitate Understanding : The compensation managementsystem should be easily understood by human resourcespecialists, operating managers and employees.

• Further Administrative Efficiency : Wage and salaryprogrammes should be so designed that they can be managedefficiently.

• Principles of Compensation Formulation : The main factorsaffecting wage or compensation levels within an organisationare – external relativities, salary and individual worth.

• External relativities – Market rate as affected by supply,demand and general movements in pay levels.

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• Individual worth : The value of the individual’s performance tothe organisation.

• Determinants of Wage Rates : Wage rates are either theproducts of market forces (supply and demand). In the UnitedStates, market forces determine wage rates. In Japan, seniorityis still the dominant factor for wage determination. Severalcountries, including have enacted a statutory minimum wagerate that fixes the price of certain kinds of labor.

• While market forces determine the wage rate in mostdeveloped countries, workers often negotiate their wage ratein most developed countries, workers often negotiate theirwage rate through collective bargaining wherever Unions arepresent.

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• Individual worth : The value of the individual’s performance tothe organisation.

• Determinants of Wage Rates : Wage rates are either theproducts of market forces (supply and demand). In the UnitedStates, market forces determine wage rates. In Japan, seniorityis still the dominant factor for wage determination. Severalcountries, including have enacted a statutory minimum wagerate that fixes the price of certain kinds of labor.

• While market forces determine the wage rate in mostdeveloped countries, workers often negotiate their wage ratein most developed countries, workers often negotiate theirwage rate through collective bargaining wherever Unions arepresent.

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• Theories of Wage Determination : There are two keytheories to determine wages – the traditional theory ofwage determination and the theory of negotiated wages.

• Traditional Theory of Wage Determination : This theoryassumes that market forces, that is, demand and supplydetermine wages. Computer programmers are in shortsupply, so they are able to command higher salaries. In ourcountry, many organisations pay very high salaries to entry-level IT professionals, who sometimes get more than seniormanagerial employees in other sectors. This is because ofdemand and supply gap.

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• Theories of Wage Determination : There are two keytheories to determine wages – the traditional theory ofwage determination and the theory of negotiated wages.

• Traditional Theory of Wage Determination : This theoryassumes that market forces, that is, demand and supplydetermine wages. Computer programmers are in shortsupply, so they are able to command higher salaries. In ourcountry, many organisations pay very high salaries to entry-level IT professionals, who sometimes get more than seniormanagerial employees in other sectors. This is because ofdemand and supply gap.

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• Theory of Negotiated Wages : Union employees cannegotiate salaries. This is done through collective bargaining .Normally, in any unionized organisations Unions periodicallysubmit their memorandum to the management, asking forwage raises to keep pace with market standards andorganisational profitability.

• Principles of Compensation Determination :• Subsistence Theory : David Ricard (1772-1832) advocated this

theory. In Ricardo’s words, workers ;should be paid “To enablethem to subsist and perpetuate the race without increase ordiminution.” The theory is based on the notion that if workersare paid more than the subsistence wage their numbers willincrease as they would procreate more

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com• Theory of Negotiated Wages : Union employees can

negotiate salaries. This is done through collective bargaining .Normally, in any unionized organisations Unions periodicallysubmit their memorandum to the management, asking forwage raises to keep pace with market standards andorganisational profitability.

• Principles of Compensation Determination :• Subsistence Theory : David Ricard (1772-1832) advocated this

theory. In Ricardo’s words, workers ;should be paid “To enablethem to subsist and perpetuate the race without increase ordiminution.” The theory is based on the notion that if workersare paid more than the subsistence wage their numbers willincrease as they would procreate more

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• And this would bring down the rate of wages. If wages fell downbelow the subsistence level, the number of workers woulddecrease, as many would die of hunger, malnutrition, disease, coldetc and many would not marry. When this happened wages wouldincrease again. In economics, the subsistence theory of wagesstates, that in the long run, wages will be reduced to the minimumlevel needed to keep workers alive.

• Wages Fund Theory : This theory was developed by Adams Smith(1723-1790) on the assumption that wages are paid out of apredetermined fund of wealth, the surplus savings of the wealthy.This fund could be utilized for employing laborers for work. If thefund was large, wages would be high; if it was small , ages would bereduced to subsistence level. The demand for labor and the level ofwages were determined by the size of the fund.

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com• And this would bring down the rate of wages. If wages fell down

below the subsistence level, the number of workers woulddecrease, as many would die of hunger, malnutrition, disease, coldetc and many would not marry. When this happened wages wouldincrease again. In economics, the subsistence theory of wagesstates, that in the long run, wages will be reduced to the minimumlevel needed to keep workers alive.

• Wages Fund Theory : This theory was developed by Adams Smith(1723-1790) on the assumption that wages are paid out of apredetermined fund of wealth, the surplus savings of the wealthy.This fund could be utilized for employing laborers for work. If thefund was large, wages would be high; if it was small , ages would bereduced to subsistence level. The demand for labor and the level ofwages were determined by the size of the fund.

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• Surplus Value Theory : The surplus value theory owes its developments toKarl Marx (1818-1883) According to this theory, labor was an article ofcommerce, which could be purchased on payment of the ‘subsistenceprice’ . The price of any product was determined by labor and timeneeded for producing it. The labor was not paid in proportion to the timespent on work, but was paid much less, and the surplus was utilized forpaying other expenses.

• Residual Claimant Theory : The residual claimant theory advocated byFrancis Walker (1840-1897) assumes that there are four factors ofproduction/business activity – land, labor, capital and entrepreneurship.Wages represent the amount of value created in the production, whichremains after payment has been made for all these factors of production.In other words, labor is the residual claimant.

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• Surplus Value Theory : The surplus value theory owes its developments toKarl Marx (1818-1883) According to this theory, labor was an article ofcommerce, which could be purchased on payment of the ‘subsistenceprice’ . The price of any product was determined by labor and timeneeded for producing it. The labor was not paid in proportion to the timespent on work, but was paid much less, and the surplus was utilized forpaying other expenses.

• Residual Claimant Theory : The residual claimant theory advocated byFrancis Walker (1840-1897) assumes that there are four factors ofproduction/business activity – land, labor, capital and entrepreneurship.Wages represent the amount of value created in the production, whichremains after payment has been made for all these factors of production.In other words, labor is the residual claimant.

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• Marginal Productivity Theory : This theory assumes that wagesare based upon an entrepreneur’s estimate of the value that willprobably be produced by the last or marginal worker.

• Types of Wages in India :

• Any minimum rate of wages or revised may consist of a basic rate ofwages and a special allowance

• The Central Government appoints a Central Advisory Board toadvise the central and state governments on the fixing and revisingof the minimum rate of wages.

• Wages in Kind : Minimum wages payable under this Act are to bepaid in Cash. However, the payment of minimum wages can bemade partly in cash and partly in kind.

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• Marginal Productivity Theory : This theory assumes that wagesare based upon an entrepreneur’s estimate of the value that willprobably be produced by the last or marginal worker.

• Types of Wages in India :

• Any minimum rate of wages or revised may consist of a basic rate ofwages and a special allowance

• The Central Government appoints a Central Advisory Board toadvise the central and state governments on the fixing and revisingof the minimum rate of wages.

• Wages in Kind : Minimum wages payable under this Act are to bepaid in Cash. However, the payment of minimum wages can bemade partly in cash and partly in kind.

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• Payment of minimum rate of wages : The employer isrequired ton pay every employee, engaged in a scheduledemployment under him, wages at a rate not less than theminimum rate of wages notified for that class of employee,without any deduction except as may be authorized.

• Overtime : If any employee whose minimum rate of wages isfixed under the Act works on any day in excess of the numberof hours constituting a normal working day, the employer isrequired to pay him for excess hours at the overtime rate fixedunder this Act or under any law of the appropriategovernment for the time being in force, whichever is higher.

• A rest day should be allowed in a week.

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required ton pay every employee, engaged in a scheduledemployment under him, wages at a rate not less than theminimum rate of wages notified for that class of employee,without any deduction except as may be authorized.

• Overtime : If any employee whose minimum rate of wages isfixed under the Act works on any day in excess of the numberof hours constituting a normal working day, the employer isrequired to pay him for excess hours at the overtime rate fixedunder this Act or under any law of the appropriategovernment for the time being in force, whichever is higher.

• A rest day should be allowed in a week.

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• Living Wage : Living wage is defined as ‘One which shouldenable the earner to provide for himself and his family notonly the bare essentials of food, clothing and shelter but ameasure of comfort, including education for his children,protection against ill-health, requirements of essential socialneeds and a measure of insurance against more importantmisfortunes, including old age.

• The Supreme Court has ruled that minimum wage must bepaid in any event, irrespective of any extent of profits, thefinancial condition of the establishment or the availability ofworkers at lower wages.

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• Living Wage : Living wage is defined as ‘One which shouldenable the earner to provide for himself and his family notonly the bare essentials of food, clothing and shelter but ameasure of comfort, including education for his children,protection against ill-health, requirements of essential socialneeds and a measure of insurance against more importantmisfortunes, including old age.

• The Supreme Court has ruled that minimum wage must bepaid in any event, irrespective of any extent of profits, thefinancial condition of the establishment or the availability ofworkers at lower wages.

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• The wages be fair, that is, sufficiently high to provide astandard family with food, shelter, clothing, medical care andeducation of children appropriate to the workers.

• Wages must be paid on industry-wise and region wise basis,having due regard to the financial capacity of the unit.

• Fair Wage : Fair wage represents the wage above theminimum wage but below the living wage. The lower limit ofthe fair wage is obviously the minimum wage. The fair wageis an adjustable step.

• Wage Board – The Government aware of the problems of theorganized labor sector felt that the trade unions hadinadequate bargaining power.

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• The wages be fair, that is, sufficiently high to provide astandard family with food, shelter, clothing, medical care andeducation of children appropriate to the workers.

• Wages must be paid on industry-wise and region wise basis,having due regard to the financial capacity of the unit.

• Fair Wage : Fair wage represents the wage above theminimum wage but below the living wage. The lower limit ofthe fair wage is obviously the minimum wage. The fair wageis an adjustable step.

• Wage Board – The Government aware of the problems of theorganized labor sector felt that the trade unions hadinadequate bargaining power.

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• The Wage Boards are tripartite in character. , that isrepresentatives of workers, employers and independentmembers. The utility of these boards are debatable. So farGovernment has appointed wage boards for Journalists andnon-journlist newspaper organisations, Sugar Sector.

• Types of Executive Compensation : Executive compensationpackages typically comprise the following components :-

• 1.Base salary 2. Annual incentives 3. Long term compensation(shares) 4. Special severance and retirement arrangements.

• Compensation Trends in India :

• There is a substantial difference in gross compensation forManagers and their immediate subordinates.

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• The Wage Boards are tripartite in character. , that isrepresentatives of workers, employers and independentmembers. The utility of these boards are debatable. So farGovernment has appointed wage boards for Journalists andnon-journlist newspaper organisations, Sugar Sector.

• Types of Executive Compensation : Executive compensationpackages typically comprise the following components :-

• 1.Base salary 2. Annual incentives 3. Long term compensation(shares) 4. Special severance and retirement arrangements.

• Compensation Trends in India :

• There is a substantial difference in gross compensation forManagers and their immediate subordinates.

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• Companies design personalized salaries out of a basket of optionsfor individuals at senior levels.

• There has been a significant increase in basic salary, and hence indeferred benefits.

• Companies have restricted non-tax perks in the form ofreimbursement under various heads to certain top levels ofmanagement.

• Companies provide higher annual increases, average incrementsvarying from 50% to 100% to different levels of management.

• A soft furnishing allowance is being provided towards the purchaseof curtains, carpets, cutlery and crockery and this is usually paid asan annual, non-taxable allowance.

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• Companies design personalized salaries out of a basket of optionsfor individuals at senior levels.

• There has been a significant increase in basic salary, and hence indeferred benefits.

• Companies have restricted non-tax perks in the form ofreimbursement under various heads to certain top levels ofmanagement.

• Companies provide higher annual increases, average incrementsvarying from 50% to 100% to different levels of management.

• A soft furnishing allowance is being provided towards the purchaseof curtains, carpets, cutlery and crockery and this is usually paid asan annual, non-taxable allowance.

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• Loans to bury-two and four wheelers are a common practice.Interest rates may vary, with the repayment period.

• Medical benefits are common, with tie-ups with insurancecompanies and hospitals in many cases. Companies organizeannual medical check-ups for all employees.

• Club memberships in the form of reimbursement of the one-time joining fee and or annual subscription to one or moreclubs is an attractive perk for senior management.

• Soft loans for purchase of furniture, appliances andcomputers re also extended to employees by someorganisation.

• Housing loan or interest subsidy is also provided.

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• Loans to bury-two and four wheelers are a common practice.Interest rates may vary, with the repayment period.

• Medical benefits are common, with tie-ups with insurancecompanies and hospitals in many cases. Companies organizeannual medical check-ups for all employees.

• Club memberships in the form of reimbursement of the one-time joining fee and or annual subscription to one or moreclubs is an attractive perk for senior management.

• Soft loans for purchase of furniture, appliances andcomputers re also extended to employees by someorganisation.

• Housing loan or interest subsidy is also provided.

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• Companies reimburse books, periodicals, newspapers, journals etc.• Leased accommodation is provided.• Elements of Employee Rewards in India :• Basic pay or base pay is the level of pay that constitute the rate for the job.

It may act as a platform for determining additional payments related toperformance, competence or skills. It may also govern pensionentitlement.

• Additions to Base Pay :• Individual Performance-related Pay : Increases in base pay or cash bonuses

are determined by performance assessment and ratings (also known asmerit pay).

• Bonus – It refers to rewards for successful performance and may berelated to the results by individual, team or the organsiation.

• Commissions – a special form of incentive in which sales representativesare paid on the basis of a percentage of the sales value they generate.

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com• Companies reimburse books, periodicals, newspapers, journals etc.

• Leased accommodation is provided.• Elements of Employee Rewards in India :• Basic pay or base pay is the level of pay that constitute the rate for the job.

It may act as a platform for determining additional payments related toperformance, competence or skills. It may also govern pensionentitlement.

• Additions to Base Pay :• Individual Performance-related Pay : Increases in base pay or cash bonuses

are determined by performance assessment and ratings (also known asmerit pay).

• Bonus – It refers to rewards for successful performance and may berelated to the results by individual, team or the organsiation.

• Commissions – a special form of incentive in which sales representativesare paid on the basis of a percentage of the sales value they generate.

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• Allowances : Elements of pay in the form of a separate sum ofmoney for such aspects of employment as overtime.

• Employee benefits – These benefits are also known asindirect pay. These include pensions, sick pay, insurance coverand company cars.

• Non-financial reward : It includes any reward that focuses onthe need people have in varying degrees for achievement,recognition, responsibility and personal growth.

• Employee Stock Options : Stock options are common inexecutive compensation. By offering stock optionsparticularly, companies may dilute ownership, infuse a senseof belongingness.

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• Allowances : Elements of pay in the form of a separate sum ofmoney for such aspects of employment as overtime.

• Employee benefits – These benefits are also known asindirect pay. These include pensions, sick pay, insurance coverand company cars.

• Non-financial reward : It includes any reward that focuses onthe need people have in varying degrees for achievement,recognition, responsibility and personal growth.

• Employee Stock Options : Stock options are common inexecutive compensation. By offering stock optionsparticularly, companies may dilute ownership, infuse a senseof belongingness.

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• Compensation Plan : Compensation Plan is defined as thecomponents of organisational compensation. A strategiccompensation plan should emphasize employee retention ,cost efficiency and a performance-driven culture.

• Compensation Practices in India : The elements of CTC arebasic pay, HRA, CCA and other allowances, PF contribution,medical reimbursement, food coupons etc. Thus CTC in realitycan be defined as the annual total cost of compensation tothe company, which employees may not get on hand.

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• Compensation Plan : Compensation Plan is defined as thecomponents of organisational compensation. A strategiccompensation plan should emphasize employee retention ,cost efficiency and a performance-driven culture.

• Compensation Practices in India : The elements of CTC arebasic pay, HRA, CCA and other allowances, PF contribution,medical reimbursement, food coupons etc. Thus CTC in realitycan be defined as the annual total cost of compensation tothe company, which employees may not get on hand.

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Performance-Related Compensation Management

• Performance Related Compensation : Employees form thecore strength of any organisation. An effective performancemanagement system ensures good quality of employees. Theperformance system links the ability and contributions ofemployees, individually and as a team, to the overallperformance of the organisation.

• A performance appraisal system in any organisation is used toformally analyze, review and evaluate performance of anemployee.

• Performance Related Pay : The term performance-related payencompasses several companywide schemes, such asemployee participation and share ownership schemes whichare awarded to the employees.

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• Performance Related Compensation : Employees form thecore strength of any organisation. An effective performancemanagement system ensures good quality of employees. Theperformance system links the ability and contributions ofemployees, individually and as a team, to the overallperformance of the organisation.

• A performance appraisal system in any organisation is used toformally analyze, review and evaluate performance of anemployee.

• Performance Related Pay : The term performance-related payencompasses several companywide schemes, such asemployee participation and share ownership schemes whichare awarded to the employees.

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Performance-Related CompensationManagement

• Performance –related pay enhances corporate performance ina competitive environment. When performance and pay arelinked together, it would be reflected in employee behavior.For example, when organisations focus on customersatisfaction, employees also focus on this aspect, ensuringquality of goods and services.

• Collective relationship in the workplace are a commonorganisational pursuit to achieve teamwork. Workplace andemployer relationship can be decollectivised byindividualizing, particularly reward mechanisms. Performancerelated pay can be used in teamwork environment i.e. socialpartnership.

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com• Performance –related pay enhances corporate performance in

a competitive environment. When performance and pay arelinked together, it would be reflected in employee behavior.For example, when organisations focus on customersatisfaction, employees also focus on this aspect, ensuringquality of goods and services.

• Collective relationship in the workplace are a commonorganisational pursuit to achieve teamwork. Workplace andemployer relationship can be decollectivised byindividualizing, particularly reward mechanisms. Performancerelated pay can be used in teamwork environment i.e. socialpartnership.

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• Organisations adopt various strategies depending upon theirbusiness priorities. A common cost minimizing strategyrequires different range of behaviors. An organsiation has todevise a PRP (Performance Related Pay) structure in tunewith its strategies.

• Monitoring and evaluation are important and organisationsoften lack focus in these areas . In teamwork systems, linkagebetween the base pay and team contribution hardly exist.Many interesting team performance bonuses and gain-sharingscheme are available.

• Employee soften perceive compensation of senior managersas being disproportionately higher.

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com• Organisations adopt various strategies depending upon their

business priorities. A common cost minimizing strategyrequires different range of behaviors. An organsiation has todevise a PRP (Performance Related Pay) structure in tunewith its strategies.

• Monitoring and evaluation are important and organisationsoften lack focus in these areas . In teamwork systems, linkagebetween the base pay and team contribution hardly exist.Many interesting team performance bonuses and gain-sharingscheme are available.

• Employee soften perceive compensation of senior managersas being disproportionately higher.

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• In most of the organisations, PRP is designed by the topmanagement and then implemented down the line.Participation and involvement of all cross-sections ofemployees is essential. The employees also feel that they arepat of the organisation and hence cooperate inimplementation.

• PRP can be designed either based on individual performancecriteria, such as piece rate wages or collective performancepay schemes such as profit-sharing. Empirically it wasestablished that PRP increases productivity of anyorganisation substantially.

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• In most of the organisations, PRP is designed by the topmanagement and then implemented down the line.Participation and involvement of all cross-sections ofemployees is essential. The employees also feel that they arepat of the organisation and hence cooperate inimplementation.

• PRP can be designed either based on individual performancecriteria, such as piece rate wages or collective performancepay schemes such as profit-sharing. Empirically it wasestablished that PRP increases productivity of anyorganisation substantially.

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• Selection of Performance Objectives :

• Performance research should delving into the issues of identifyingthe performance objectives both for the individual employee andalso for the organisation as a whole. The performance objectivesmust be : (1) focused on a result (2) consistent (3) specific (4)measurable (5) related to time (6) attainable.

• Developing Performance Standards : For effective compensationdesign, developing performance standards is an important task. Forexample, Task description – Write Annual Reports – StandardProduce Monthly Reports as per departmental format and submitto Business Heads within 5 working of the close of the beginning ofcalendar month.

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• Selection of Performance Objectives :

• Performance research should delving into the issues of identifyingthe performance objectives both for the individual employee andalso for the organisation as a whole. The performance objectivesmust be : (1) focused on a result (2) consistent (3) specific (4)measurable (5) related to time (6) attainable.

• Developing Performance Standards : For effective compensationdesign, developing performance standards is an important task. Forexample, Task description – Write Annual Reports – StandardProduce Monthly Reports as per departmental format and submitto Business Heads within 5 working of the close of the beginning ofcalendar month.

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• Guidelines :• Performance Standards should be related to the employee’s

assigned work and job requirements (check job descriptions)

• Quantifiable measures may not apply for all functions.Describe in clear and specific terms the characteristics ofperformance quality that are verifiable ad that would meet orexceed expectations.

• Accomplishment of organisational objectives should beincluded where appropriate, such as cost control, improv3edefficiency, productivity, project completion, customer serviceetc.

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• Guidelines :• Performance Standards should be related to the employee’s

assigned work and job requirements (check job descriptions)

• Quantifiable measures may not apply for all functions.Describe in clear and specific terms the characteristics ofperformance quality that are verifiable ad that would meet orexceed expectations.

• Accomplishment of organisational objectives should beincluded where appropriate, such as cost control, improv3edefficiency, productivity, project completion, customer serviceetc.

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• Check list :• Are the standards realistic ? Are the standards specific ? Are

the standards based on measurable data ? Are the Standardsconsistent with organisational goals ? Standards should linkindividual and team performance to organisational goals ?Are the standards challenging ? Recognizing performancethat is above expectations or outstanding is crucial tomotivating employees.

• Are the Standards dynamic ? As organisational goals,technologies change, standards should evolve.

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• Check list :• Are the standards realistic ? Are the standards specific ? Are

the standards based on measurable data ? Are the Standardsconsistent with organisational goals ? Standards should linkindividual and team performance to organisational goals ?Are the standards challenging ? Recognizing performancethat is above expectations or outstanding is crucial tomotivating employees.

• Are the Standards dynamic ? As organisational goals,technologies change, standards should evolve.

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• Compensation Design Through Skill-Based Programmes :

• Compensation design through a skill-based programmerewards employees for attainment of additional skills andknowledge. A skill-based pay system enables employees toenjoy addition payment of compensation for new learning.

• This process can develop multi-skilled employees in anorganisation, competent to execute jobs in different cross-functions. Fro example, Bank employees become eligible foradditional increments after completion of CAIIB examination.College Lecturers become eligible to get additional incrementsafter completing Ph.D course.

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• Compensation Design Through Skill-Based Programmes :

• Compensation design through a skill-based programmerewards employees for attainment of additional skills andknowledge. A skill-based pay system enables employees toenjoy addition payment of compensation for new learning.

• This process can develop multi-skilled employees in anorganisation, competent to execute jobs in different cross-functions. Fro example, Bank employees become eligible foradditional increments after completion of CAIIB examination.College Lecturers become eligible to get additional incrementsafter completing Ph.D course.

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• Competency Based Pay : Theoretically, in today’sorganisations, the term competency, rather than skill is used.Competency is more holistic, as it aggregates knowledge, skilland abilities of employees, integrated with the behavioralrequirements. Instead of compensating for the position andthe job title, competency-based pay emphasizes on the jobaccomplishments, much wider than job efficiency (outcome ofskill only).

• The major goal of any compensation programme is tomotivate employees to deliver their performance. Merit-based pay mainly focuses on employee performance.

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• Competency Based Pay : Theoretically, in today’sorganisations, the term competency, rather than skill is used.Competency is more holistic, as it aggregates knowledge, skilland abilities of employees, integrated with the behavioralrequirements. Instead of compensating for the position andthe job title, competency-based pay emphasizes on the jobaccomplishments, much wider than job efficiency (outcome ofskill only).

• The major goal of any compensation programme is tomotivate employees to deliver their performance. Merit-based pay mainly focuses on employee performance.

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Team Based Compensation Management

• Introduction : The team-based compensation system rewardsemployees who work in a team. This means that individualemployees are compensated based on the team performance.

• It has been proved that employees working in a team deliverbetter results than those who work individually. It alsorequires the adoption of a collective performance evaluationmethod, rather than individual assessment based on theresult areas (KRAs). A team based compensation systememphasizes on team performance.

• Team based rewards , therefore, reward the behavior ofpeople working in a team who can sustain team performance.

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• Introduction : The team-based compensation system rewardsemployees who work in a team. This means that individualemployees are compensated based on the team performance.

• It has been proved that employees working in a team deliverbetter results than those who work individually. It alsorequires the adoption of a collective performance evaluationmethod, rather than individual assessment based on theresult areas (KRAs). A team based compensation systememphasizes on team performance.

• Team based rewards , therefore, reward the behavior ofpeople working in a team who can sustain team performance.

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Team Based CompensationManagement

• Organisations adopted the idea of team work during the lateeighties, when teamwork was found more effective andcompetitive operationally. The collective efforts of people ina team setting increase overall performance and productivity.

• Teamwork helps organisations benefit from synergy,cooperation and the unity of command. It is driven by oneaim/goal, provides flexibility, and ensures better customerservice. However, teamwork can only be efficient if the teamis composed of ‘like-minded’ , intelligent people, not justintelligent people.

• Designing team-based compensation in an organisation isoperationally not always possible. This is because absolute

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eighties, when teamwork was found more effective andcompetitive operationally. The collective efforts of people ina team setting increase overall performance and productivity.

• Teamwork helps organisations benefit from synergy,cooperation and the unity of command. It is driven by oneaim/goal, provides flexibility, and ensures better customerservice. However, teamwork can only be efficient if the teamis composed of ‘like-minded’ , intelligent people, not justintelligent people.

• Designing team-based compensation in an organisation isoperationally not always possible. This is because absolute

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• Teamwork is often more a myth than a reality. It may be donethrough monthly or quarterly rewards to employees, based onthe degree of their improvement in performance.

• Usually 5 to 10% of base pay is provided as an incentive toreward individual employees. Apart from team performancecriteria, team members’ contribution to productivity, costsavings and quality are the other elements considered forteam-based compensation. Gift is the common example ofnon-financial team-based compensation.

• Lump sum rewards, irrespective of base pay is a conventionused by organsiations in rewarding team members.

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• Teamwork is often more a myth than a reality. It may be donethrough monthly or quarterly rewards to employees, based onthe degree of their improvement in performance.

• Usually 5 to 10% of base pay is provided as an incentive toreward individual employees. Apart from team performancecriteria, team members’ contribution to productivity, costsavings and quality are the other elements considered forteam-based compensation. Gift is the common example ofnon-financial team-based compensation.

• Lump sum rewards, irrespective of base pay is a conventionused by organsiations in rewarding team members.

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• Moreover, organisations customize team-basedcompensation based on organisational strategy. Team basedcompensation encourages members to cooperate, as they arerewarded based on the performance of the team as a whole.

• Individual rewards consisting of enhanced rate of bonus,promotions, increment etc are often considered against theprinciples of collectivism. Relative rewards naturally inducecompetition and a moderate rate of competition in teamworkis always possible.

• Group Incentive Plans : In team-based compensation design,providing a group incentive to team members is oftencommon.

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com• Moreover, organisations customize team-based

compensation based on organisational strategy. Team basedcompensation encourages members to cooperate, as they arerewarded based on the performance of the team as a whole.

• Individual rewards consisting of enhanced rate of bonus,promotions, increment etc are often considered against theprinciples of collectivism. Relative rewards naturally inducecompetition and a moderate rate of competition in teamworkis always possible.

• Group Incentive Plans : In team-based compensation design,providing a group incentive to team members is oftencommon.

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• The entire team shares the reward based on performancegains, which are linked to the overall profitability of theorganisation. To design an effective group incentive plan, anorganisation should first identify performance targets and thestandards of performance required to achieve theperformance targets. It then needs to document thesestandards so that it can properly guide team members. In thesaid documentation, the organisation also needs to specifyhow rewards will be allocated.

• The group incentive plan thus helps the team members tofocus on specific performance targets.

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• The entire team shares the reward based on performancegains, which are linked to the overall profitability of theorganisation. To design an effective group incentive plan, anorganisation should first identify performance targets and thestandards of performance required to achieve theperformance targets. It then needs to document thesestandards so that it can properly guide team members. In thesaid documentation, the organisation also needs to specifyhow rewards will be allocated.

• The group incentive plan thus helps the team members tofocus on specific performance targets.

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• Effective Design of team-based compensation : Organisationsneed to link the proposed compensation design with thestrategy, culture and competencies of employees.Understand the nature and types of teams and job categories,evaluate performance properly and design a system.

• Organisations can have different types of teams – Projectteam, hybrid teams, parallel team.

• Parallel team members are temporarily assigned some tasksto accomplish. They are selected from different functionalareas. On completion of the assigned tasks or project, theyare sent back tot heir mother department. The design ofteam-based compensation for a short time frame is difficult.

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com• Effective Design of team-based compensation : Organisations

need to link the proposed compensation design with thestrategy, culture and competencies of employees.Understand the nature and types of teams and job categories,evaluate performance properly and design a system.

• Organisations can have different types of teams – Projectteam, hybrid teams, parallel team.

• Parallel team members are temporarily assigned some tasksto accomplish. They are selected from different functionalareas. On completion of the assigned tasks or project, theyare sent back tot heir mother department. The design ofteam-based compensation for a short time frame is difficult.

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• Project Team – Members work full-time in a Project Team sothe reward so the reward largely follows the principles ofequity.

• The most commonly used criteria for team-basedcompensation design – are appropriate behavioralcompetencies, demonstration of skill and knowledgeacquisition, achievement of specific time-bound objectivesand quantitative and qualitative objectives.

• For a project team, results are most important criteria. http

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• Project Team – Members work full-time in a Project Team sothe reward so the reward largely follows the principles ofequity.

• The most commonly used criteria for team-basedcompensation design – are appropriate behavioralcompetencies, demonstration of skill and knowledgeacquisition, achievement of specific time-bound objectivesand quantitative and qualitative objectives.

• For a project team, results are most important criteria.

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Employee Benefits

• Employee benefit is a holistic term , comprising of both wageand non-wage components of total labor costs. Employeebenefits are known as fringe benefits or perks.

• When employee benefits are given in cash it is called wage orsalary. Both the wage and non-wage components are taxableexcept a few.

• Going by industry practice, we can categorize employeebenefits as group insurance, retirement benefits, contributionto social security systems, club membership, vacation leaveetc. Most employee benefits are paid by employers, while insome such as social security benefits are paid by employersand employees.

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com• Employee benefit is a holistic term , comprising of both wage

and non-wage components of total labor costs. Employeebenefits are known as fringe benefits or perks.

• When employee benefits are given in cash it is called wage orsalary. Both the wage and non-wage components are taxableexcept a few.

• Going by industry practice, we can categorize employeebenefits as group insurance, retirement benefits, contributionto social security systems, club membership, vacation leaveetc. Most employee benefits are paid by employers, while insome such as social security benefits are paid by employersand employees.

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Employee Benefits

• In some organisations, perks is used interchangeably withemployee benefits. Conventionally, perks denote thoseemployee benefits which are discretionary in nature andusually paid to senior level employees

• Companies use perks even for non-discretionary or statutorybenefits. For example, canteen facilities are mandatory fororganisations that employ more than a certain number ofemployees at one work location.

• Going again by industry practice, some common perks arecompany cars, hotel stays, refreshments, leisure activities etc.

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• In some organisations, perks is used interchangeably withemployee benefits. Conventionally, perks denote thoseemployee benefits which are discretionary in nature andusually paid to senior level employees

• Companies use perks even for non-discretionary or statutorybenefits. For example, canteen facilities are mandatory fororganisations that employ more than a certain number ofemployees at one work location.

• Going again by industry practice, some common perks arecompany cars, hotel stays, refreshments, leisure activities etc.

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Employee Benefits

• Non-Monetary benefits : Non-monetary benefits are used,either when the organsiation feels that any additionalmonetary compensation will reduce the cost-competitivenessor when organisations strategically use this for motivation andretention.

• Achieving success is the first priority. Hence any reward orincentive, which does not strain organisational financialhealth is always desirable. The aim is to motivate employeesand turn them into good performers. Although monetarycompensation is the prime mover in this respect, carefullychosen non-monetary compensation can also do wonders.

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• Non-Monetary benefits : Non-monetary benefits are used,either when the organsiation feels that any additionalmonetary compensation will reduce the cost-competitivenessor when organisations strategically use this for motivation andretention.

• Achieving success is the first priority. Hence any reward orincentive, which does not strain organisational financialhealth is always desirable. The aim is to motivate employeesand turn them into good performers. Although monetarycompensation is the prime mover in this respect, carefullychosen non-monetary compensation can also do wonders.

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Employee Benefits

• Non-monetary benefits can be provided in various forms(such as stock etc.). Globally, non-monetary compensationand benefits are gaining importance. The common non-monetary incentives are – career advancement opportunities,flexible working hours, and opportunities to acquire new skillsand knowledge.

• The young age group values recognition and careeradvancement. Functional autonomy, personal recognition,pleasant work environment , training, flexible working hoursand challenging opportunities help attract and retainemployees.

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• Non-monetary benefits can be provided in various forms(such as stock etc.). Globally, non-monetary compensationand benefits are gaining importance. The common non-monetary incentives are – career advancement opportunities,flexible working hours, and opportunities to acquire new skillsand knowledge.

• The young age group values recognition and careeradvancement. Functional autonomy, personal recognition,pleasant work environment , training, flexible working hoursand challenging opportunities help attract and retainemployees.

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Employee Benefits

• Tax Obligations on Employee Benefits : As per tax laws,employee benefits, both monetary and non-monetary areconsidered fringe benefits. In India, they are subject to taxliabilities. Employee benefits in the form of profit sharing acreoften used by organisations as incentive plans. Profit dependsupon organisational profitability and thus it is not predictableor regular income for employees. Many companies allot shareto their employees.

• Organisations also often golden parachute clauses asemployee benefits, particularly, to protect executives frompossible termination in the event that company is acquired.Such a benefit is severance pay.

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• Tax Obligations on Employee Benefits : As per tax laws,employee benefits, both monetary and non-monetary areconsidered fringe benefits. In India, they are subject to taxliabilities. Employee benefits in the form of profit sharing acreoften used by organisations as incentive plans. Profit dependsupon organisational profitability and thus it is not predictableor regular income for employees. Many companies allot shareto their employees.

• Organisations also often golden parachute clauses asemployee benefits, particularly, to protect executives frompossible termination in the event that company is acquired.Such a benefit is severance pay.

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Employee Benefits

• Similarly, a golden handshake clause entitles employees toreceive huge benefits as a severance package. Organisationsbecause of restructuring may often hive off employees, givingthem the option of pre-mature retirement.

• In India, voluntary retirees availing golden handshakes caninvest their receipts in post offices up to a ceiling of Rs.15lakhs to get a relatively higher rate of interest at 9 per centper annum.

• Types of Employee Benefits :

• Employment Security , Unemployment allowance orinsurance, overtime pay, leave pay, pay for holidays, lay offcompensation, retrenchment compensation etc.

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• Similarly, a golden handshake clause entitles employees toreceive huge benefits as a severance package. Organisationsbecause of restructuring may often hive off employees, givingthem the option of pre-mature retirement.

• In India, voluntary retirees availing golden handshakes caninvest their receipts in post offices up to a ceiling of Rs.15lakhs to get a relatively higher rate of interest at 9 per centper annum.

• Types of Employee Benefits :

• Employment Security , Unemployment allowance orinsurance, overtime pay, leave pay, pay for holidays, lay offcompensation, retrenchment compensation etc.

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Employee Benefits• Medical and healthcare : Accident insurance, disability

insurance, life insurance, medical care, sick leave etc.

• Old Age and retirement benefits – Pension, gratuity,provident fund, old-age medical benefits for retiredemployees, travelling concession for retired employees etc.

• Miscellaneous benefits – Birthday gifts, attendance bonus,canteen, cooperative credit societies, educational facilities,recreational programmes etc.

• Statutory benefits in India :

• Bonus – Bonus is an extra payment payable to workmen at aminimum of 8.33 percent as minimum. Maximum @ 20% ofBasic and dearness allowance.

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com• Medical and healthcare : Accident insurance, disability

insurance, life insurance, medical care, sick leave etc.

• Old Age and retirement benefits – Pension, gratuity,provident fund, old-age medical benefits for retiredemployees, travelling concession for retired employees etc.

• Miscellaneous benefits – Birthday gifts, attendance bonus,canteen, cooperative credit societies, educational facilities,recreational programmes etc.

• Statutory benefits in India :

• Bonus – Bonus is an extra payment payable to workmen at aminimum of 8.33 percent as minimum. Maximum @ 20% ofBasic and dearness allowance.

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Employee Benefits

• Retrenchment Compensation : The Industrial Disputes Act,1947 provides for payment of compensation in case of lay-offand retrenchment employing 50 or more workers.Compensation is paid at the rate of 15 days of wages for everycompleted year of service. Workers are eligible forcompensation in case of closure of undertakings.

• Lay off compensation – In case of lay off, employees areentitled to 50% of the total basic wags and dearnessallowance for the period of lay off, maximum up to 345 daysin a year. ht

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• Retrenchment Compensation : The Industrial Disputes Act,1947 provides for payment of compensation in case of lay-offand retrenchment employing 50 or more workers.Compensation is paid at the rate of 15 days of wages for everycompleted year of service. Workers are eligible forcompensation in case of closure of undertakings.

• Lay off compensation – In case of lay off, employees areentitled to 50% of the total basic wags and dearnessallowance for the period of lay off, maximum up to 345 daysin a year.

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Employee Benefits

• A deferred Compensation Plan is an arrangement whereby anemployee or owner defers some portion of an employee’scurrent income until a specified future date.

• Life Insurance can be used to fund a deferred compensationplan. Premiums are paid by the company. The cash value canthen be available at retirement to supplement other income.

• Objectives of fringe benefits :

• Create and improve sound industrial relations, boostemployee morale, motivate employees by satisfying theirneeds, provide a good work environment and work life ,promote employee welfare

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• A deferred Compensation Plan is an arrangement whereby anemployee or owner defers some portion of an employee’scurrent income until a specified future date.

• Life Insurance can be used to fund a deferred compensationplan. Premiums are paid by the company. The cash value canthen be available at retirement to supplement other income.

• Objectives of fringe benefits :

• Create and improve sound industrial relations, boostemployee morale, motivate employees by satisfying theirneeds, provide a good work environment and work life ,promote employee welfare

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Employee benefits

• Employee benefit programes are necessary as they help to :-

• enable employees to guard against rising prices and cost ofliving, avail of the most cost-effective compensation plan,attract and retain employees, encash the opportunities of taxsaving (wherever possible)

• Demonstrate employers’ concern for employees

• Meet the legal requirements of compensation and welfare ofemployees.

• Accede to the demands of the trade union. http

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• Employee benefit programes are necessary as they help to :-

• enable employees to guard against rising prices and cost ofliving, avail of the most cost-effective compensation plan,attract and retain employees, encash the opportunities of taxsaving (wherever possible)

• Demonstrate employers’ concern for employees

• Meet the legal requirements of compensation and welfare ofemployees.

• Accede to the demands of the trade union.

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Employee Motivation andCompensation

• Organisations design compensation as an additionalmotivation for employees. Motivated employees deliver theirbest and significantly contribute to organisational growth andprosperity.

• A well-designed compensation structure can motivateemployees. Feeling motivated is an important behavioralrequirement of human resources of any organisation.

• A motivating compensation design not only motivates theemployees to become good performers, but also attractsthem to join organisations and continue with them.

• After employees are hired and trained, it is important tomotivate them to get the desired results from them.

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• Organisations design compensation as an additionalmotivation for employees. Motivated employees deliver theirbest and significantly contribute to organisational growth andprosperity.

• A well-designed compensation structure can motivateemployees. Feeling motivated is an important behavioralrequirement of human resources of any organisation.

• A motivating compensation design not only motivates theemployees to become good performers, but also attractsthem to join organisations and continue with them.

• After employees are hired and trained, it is important tomotivate them to get the desired results from them.

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• Although many definitions of the term ‘motivation’ areavailable, all of them converge top what energizes humanbehavior, what directs such behavior and how such behavioris maintained or sustained.

• A compensation design to derive the benefit of motivationneeds to focus on all these aspects so that the desiredbehavioral out come in employees could lead to significantchanges in the organisational performance.

• After employees are hired and trained, it is important tomotivate them to get the desired results from them toachieve the organisational objectives.

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• Although many definitions of the term ‘motivation’ areavailable, all of them converge top what energizes humanbehavior, what directs such behavior and how such behavioris maintained or sustained.

• A compensation design to derive the benefit of motivationneeds to focus on all these aspects so that the desiredbehavioral out come in employees could lead to significantchanges in the organisational performance.

• After employees are hired and trained, it is important tomotivate them to get the desired results from them toachieve the organisational objectives.

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• While designing a compensation package, employeeexpectations that suitably identify their extrinsic and intrinsicneeds are perceived to be met within the given policies of theorganisations.

• But major problems on employee motivation become evidentwhen employees start perceiving that there is a widemismatch between their expectations and organisationalcommitments. At times, such perceived expectations of theemployees far e4xceed the organisational commitments,resulting in a significant gap in the perception of employees.

• Motivational factors are the perceived needs of theemployees; if needs are satisfied , it contributes to an increase

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com• While designing a compensation package, employee

expectations that suitably identify their extrinsic and intrinsicneeds are perceived to be met within the given policies of theorganisations.

• But major problems on employee motivation become evidentwhen employees start perceiving that there is a widemismatch between their expectations and organisationalcommitments. At times, such perceived expectations of theemployees far e4xceed the organisational commitments,resulting in a significant gap in the perception of employees.

• Motivational factors are the perceived needs of theemployees; if needs are satisfied , it contributes to an increase

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• In performance and productivity of employees. Motivationprocess starts with a physiological or psychological deficiencyor need that activates behavior or a drive that is aimed at agoal or incentive.

• In the first stage, it is important to identify the needdeficiency of the employees. Need deficiency centres onextrinsic and intrinsic needs. Extrinsic needs are related tomaterial and tangible gains. Increased pay, incentives, bonus,better medical facilities, better retirement benefits, bettercanteen facilities are some examples of extrinsic needs.

• Intrinsic needs, on the other hand are abstract in nature,related to mental satisfaction, a sense of belonging, scope forgrowth, creativity, recognition etc.

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com• In performance and productivity of employees. Motivation

process starts with a physiological or psychological deficiencyor need that activates behavior or a drive that is aimed at agoal or incentive.

• In the first stage, it is important to identify the needdeficiency of the employees. Need deficiency centres onextrinsic and intrinsic needs. Extrinsic needs are related tomaterial and tangible gains. Increased pay, incentives, bonus,better medical facilities, better retirement benefits, bettercanteen facilities are some examples of extrinsic needs.

• Intrinsic needs, on the other hand are abstract in nature,related to mental satisfaction, a sense of belonging, scope forgrowth, creativity, recognition etc.

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• Organisations can identify the appropriate strategy to closethe perceived need gap of employees. There are manyinnovative ways to close such a need gap without muchvariation in the budget. For example, the need for increasedpay can be met by reducing deferred benefits and includingthem in the current pay of employees. This is particularlyimportant for young employees less than 35 years.

• Objectives of Motivation :

• Motivation enhances performance and improves productivity.The following are the important objectives of motivation :-

• Increased Efficiency : The efficiency of motivated employeesincreases, as it augments their willingness to work.

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• Organisations can identify the appropriate strategy to closethe perceived need gap of employees. There are manyinnovative ways to close such a need gap without muchvariation in the budget. For example, the need for increasedpay can be met by reducing deferred benefits and includingthem in the current pay of employees. This is particularlyimportant for young employees less than 35 years.

• Objectives of Motivation :

• Motivation enhances performance and improves productivity.The following are the important objectives of motivation :-

• Increased Efficiency : The efficiency of motivated employeesincreases, as it augments their willingness to work.

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• Quality Consciousness : Motivated employees also becomequality conscious.

• Goal directed behavior : By promoting goal-directed behavior,motivated employees also help realize organisationalobjectives and strategies.

• Productive Use of Resources : Physical, financial and humanresources are the important source construct s for anorganisation.

• Motivation also promotes friendly work culture, increasedmorale, increased sense of responsibility, identity withorganisation etc.

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• Quality Consciousness : Motivated employees also becomequality conscious.

• Goal directed behavior : By promoting goal-directed behavior,motivated employees also help realize organisationalobjectives and strategies.

• Productive Use of Resources : Physical, financial and humanresources are the important source construct s for anorganisation.

• Motivation also promotes friendly work culture, increasedmorale, increased sense of responsibility, identity withorganisation etc.

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• Motivation ensures organisational stability by reducing employeeturnover and absenteeism.

• Motive is the inner state that activates and directs the behavior ofindividuals towards certain goals. Motives create a drive thatenergizes individuals into action.

• Motivating implies inducements to energize work behavior.Motivating is part of a managerial task. Managers always endeavorto sustain the motivating environment to get work done in anefficient and effective manner.

• Relationship between motivation and compensation : A paycompensation system needs to be motivating in order to :-

• Attract individuals with knowledge, ability and talent as demandedby specific organisational tasks.

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• Motivation ensures organisational stability by reducing employeeturnover and absenteeism.

• Motive is the inner state that activates and directs the behavior ofindividuals towards certain goals. Motives create a drive thatenergizes individuals into action.

• Motivating implies inducements to energize work behavior.Motivating is part of a managerial task. Managers always endeavorto sustain the motivating environment to get work done in anefficient and effective manner.

• Relationship between motivation and compensation : A paycompensation system needs to be motivating in order to :-

• Attract individuals with knowledge, ability and talent as demandedby specific organisational tasks.

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• Promote high degree of job involvement and job satisfactionand an attitude conducive to loyalty and commitment to theorganisation.

• Similar to motivation, compensation also has two importantcomponents. Monetary and non-monetary. Organisationsfulfill the extrinsic motivational requirements by designingcompensation that emphasizes on cash component. S0me ofthe intrinsic compensation components are job security,improved work conditions, status, sense of accomplishment,challenging assignments, increased job responsibilities needsto establish a correlation between performance and rewards.

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• Promote high degree of job involvement and job satisfactionand an attitude conducive to loyalty and commitment to theorganisation.

• Similar to motivation, compensation also has two importantcomponents. Monetary and non-monetary. Organisationsfulfill the extrinsic motivational requirements by designingcompensation that emphasizes on cash component. S0me ofthe intrinsic compensation components are job security,improved work conditions, status, sense of accomplishment,challenging assignments, increased job responsibilities needsto establish a correlation between performance and rewards.

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• Theories of Motivation :

• Frederick Taylor, the Father of Scientific Managementobserved that prosperity of management and work force areinter-dependent. Individuals are inherently capable ofworking hard but they show such qualitie4s irregularly. Toharness this feature of individual behavior, pay and rewards(incentives) must be linked to achievement of ‘optimumgoals’. While good performers get rewards and better pay,bad performers lose on this count.

• Maslow , through his need hierarchy theory, established thatmotivation of individuals arises from a hierarchy of needs.

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• Theories of Motivation :

• Frederick Taylor, the Father of Scientific Managementobserved that prosperity of management and work force areinter-dependent. Individuals are inherently capable ofworking hard but they show such qualitie4s irregularly. Toharness this feature of individual behavior, pay and rewards(incentives) must be linked to achievement of ‘optimumgoals’. While good performers get rewards and better pay,bad performers lose on this count.

• Maslow , through his need hierarchy theory, established thatmotivation of individuals arises from a hierarchy of needs.

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• Hackman and Oldham (1974) developed a job characteristicmodel by showing how a good job design can lead to internalmotivation of the employees and contribute to better jobperformance. The theory postulates that five jobcharacteristics like skill variety, task identity and tasksignificance, autonomy and feedback

• Skill variety is the extent or range of skills, abilities and talentof the employees. The more they are able to utilize their skillson the job, the greater their level of satisfaction. Hence jobsare to be designed in such a way that ensures utilization ofthe wide skill variety of the individuals.

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• Hackman and Oldham (1974) developed a job characteristicmodel by showing how a good job design can lead to internalmotivation of the employees and contribute to better jobperformance. The theory postulates that five jobcharacteristics like skill variety, task identity and tasksignificance, autonomy and feedback

• Skill variety is the extent or range of skills, abilities and talentof the employees. The more they are able to utilize their skillson the job, the greater their level of satisfaction. Hence jobsare to be designed in such a way that ensures utilization ofthe wide skill variety of the individuals.

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• Task significance denotes significance of a job on the life of others bothwithin and outside the organisation. A positive significance of a job givespsychological satisfaction to the individual who performs a job.

• Autonomy is the extent of freedom given for a job. The more jobautonomy, the greater the job satisfaction and so also motivation.Feedback provides the opportunity to assess the right way of executing ajob.

• Feedback provides the opportunity to assess the right way of executive ajob.

• Skill variety, task identity and task significance provide ‘experiencedmeaningfulness’. Autonomy provided ‘experienced responsibility’ whilefeedback provides ‘experienced knowledge of results’.

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• Task significance denotes significance of a job on the life of others bothwithin and outside the organisation. A positive significance of a job givespsychological satisfaction to the individual who performs a job.

• Autonomy is the extent of freedom given for a job. The more jobautonomy, the greater the job satisfaction and so also motivation.Feedback provides the opportunity to assess the right way of executing ajob.

• Feedback provides the opportunity to assess the right way of executive ajob.

• Skill variety, task identity and task significance provide ‘experiencedmeaningfulness’. Autonomy provided ‘experienced responsibility’ whilefeedback provides ‘experienced knowledge of results’.

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• Motivation and Morale : Edwin Flippo (1989) defined moraleas “A mental condition or attitude of individual and groupswhich determines their willingness to cooperate. If employeesappear to feel enthusiastic and optimistic about groupactivities , they are described as having a good or high morale.

• Motivation stimulates individuals into action to achieve thedesired goals. It is, therefore, a function of need and drives.It mobilizes energy, which enhances the potential for morale.Morale, on the other hand is the individual or group attitudetowards a particular subject. It contributes to general feelingof satisfaction at the workplace.

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• Motivation and Morale : Edwin Flippo (1989) defined moraleas “A mental condition or attitude of individual and groupswhich determines their willingness to cooperate. If employeesappear to feel enthusiastic and optimistic about groupactivities , they are described as having a good or high morale.

• Motivation stimulates individuals into action to achieve thedesired goals. It is, therefore, a function of need and drives.It mobilizes energy, which enhances the potential for morale.Morale, on the other hand is the individual or group attitudetowards a particular subject. It contributes to general feelingof satisfaction at the workplace.

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• Factors that affect morale are primarily attitude and jobsatisfaction level of individual employees. From anorganisational point of view, such factors can be delineatedinto organisational goals, leadership styles, nature of work,work environment etc.

• High morale is conventionally considered as a contributor tohigh productivity.

• Motivational Research and Compensation Design :

• To design an appropriate compensation that motivatesemployees, it is important to understand the motivationalresearch process. There are numerous studies on employeemotivation in the literature.

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• Factors that affect morale are primarily attitude and jobsatisfaction level of individual employees. From anorganisational point of view, such factors can be delineatedinto organisational goals, leadership styles, nature of work,work environment etc.

• High morale is conventionally considered as a contributor tohigh productivity.

• Motivational Research and Compensation Design :

• To design an appropriate compensation that motivatesemployees, it is important to understand the motivationalresearch process. There are numerous studies on employeemotivation in the literature.

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• The ranked order of motivating factors found in a researchstudy :- 1. interesting work 2. good wages 3.. Full appreciationof work done 4. job security 5. good working conditions 6.sympathetic help with personal problems.

• In designing compensation that motivates employees, anorganisation has to appreciate human resource approaches,which are distinctly different and traditional models.

• To motivate employees organisations need to make workmore meaningful and challenging. Employees are consideredto be creative, responsible and generally believe in self-direction, it is important to design job that makes use of theseskills.

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com• The ranked order of motivating factors found in a research

study :- 1. interesting work 2. good wages 3.. Full appreciationof work done 4. job security 5. good working conditions 6.sympathetic help with personal problems.

• In designing compensation that motivates employees, anorganisation has to appreciate human resource approaches,which are distinctly different and traditional models.

• To motivate employees organisations need to make workmore meaningful and challenging. Employees are consideredto be creative, responsible and generally believe in self-direction, it is important to design job that makes use of theseskills.