Basics of Compensation Management

Compensation Management:

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.

Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing total compensation package. The traditional concept of wage and salary administration emphasized on only determination of wage and salary structures in organizational settings. However, over the passage of time, many more forms of compensation as discussed earlier, entered the business field which necessitated to take wage and salary administration in comprehensive way with a suitable change in its nomenclature. Beach has defined wage and salary administration as follows:

"Wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organizational problems, development and maintenance of wage structure, establishing rules for administering wages. Wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items"

Components of Compensation system:

The literal meaning of compensation is to counter-balance. In the case of human resource management, compensation is referred to as money and other benefits received by an employee for providing services to his employer. Money and benefits received may be in different forms-base compensation in money fonn and various benefits, which may be associated with employee's service to the employer like provident fund, gratuity, and insurance scheme, and any otherpayment which the employee receives or benefits he enjoys in lieu of such payment. Cascio has defined compensation as follows:

"Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity”Based on above description of compensation, we may identify its various components as follows:

Wage and Salary:Wage and salary are the most important component of compensation and these are essential irrespective of the type oforganization. Wage is referred to as remuneration to workers particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar employees including managerial personnel. Wages and salary are paid on the basis of fixed period of time and normally not associated with productivity of an employee at a particular time.

Incentives:Incentives are the additional payment to employees besides the payment of wages and salaries. Often these are linked with productivity, either in terms of higher production or cost saving or both.These incentives may be given on individual basis or group basis.

Fringe Benefits:Fringe benefits include such benefits which are provided to the employees either having long-term impact like provident fund, gratuity, pension; or occurrence of certain events like medical benefits, accident relief, health and life insurance; or facilitation in performance of job like uniforms, Canteens, recreation, etc.

Perquisites:These are normally provided to managerial personnel either to facilitate their job performance or to retain them in the organization.Such perquisites include company car, club membership, free residential accommodation, paid holiday trips, stock options, etc.

Wages:

According to economic theory, wages are defined broadly as any economic compensation paid by the employer to his laborers under some contract for the services rendered by them. In its actual sense which is prevalent in the practice,

wages are paid to workers which include basic wages and other allowances which are linked with the wages like dearness allowances, etc.

Traditionally, in the absence of any bargaining power possessed by laborers, they did not have any say in the determination of wages paid to them. This has led to the development of several theories of wages such as subsistence theory by Ricardo, wage fund theory by Adam Smith, surplus value theory by Karl Marx, residual claimant theory by Frascis Walker, marginal productivity theory by Philip Wickstted and John Clark, bargaining theory by John Davidson and behavioral theory by James March and Herbert Simon. Each theory tries to explain how wages are determined. In the Indian context, soon after the independence, Government of India set up a Committee on Fair Wages in 1948 which has defined various concepts of wages which govern the wage structure in the country specially in those sectors which can be termed as underpaid and where workers do not have bargaining power through unions. These concepts are: minimum wage, living wage, and fair wage. Later, the concept of need based minimum wage was added. Let us have a brief look at these concepts.

Minimum Wage:A minimum wage is one which has to be paid by an employer to his workers irrespective of his ability to pay. According to the above committee,

"Minimum wage is the wage which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the workers. For this purpose, minimum wage must provide some measure of education, medical requirements and amenities. "

Subsequent to the committee's report, Government enacted legal provisions regarding minimum wages under the Minimum Wages Act. 1948. This Act does not define the concept of minimum wages but empowers the Central Government as well as State Governments to fix minimum wages from time to time. Wherever this Act applies, the payment of minimum wages is mandatory. In 1957, Indian Labor Conference elaborated the concept of fixation of minimum wars which were termed as need-based minimum wages.

For the calculation of wages, the Conference suggested the following guidelines: The standard working class family should be taken to consist of three consumption units for the earner; the

earnings of women, children and adolescents should be disregarded. The minimum food requirements should be calculated on the basis of the net intake of 2.700 calories per adult. The clothing requirements should be estimated at a per capita consumption of 18 yards per annum per person. In respect of housing. the norms should be the minimum rent charged by the Government in any area for houses provided under subsidized housing scheme for low-income groups. Fuel. Lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimum

wage.

Living Wage:Along with the minimum wage the Committee on Fair Wages has given the concept of living wage which has been defined as follows:

"A living wage is one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against the more important misfortunes including old age. "

Living wage is more than the concept of minimum wage. Such a wage is determined keeping in view the national income and paying capacity of industrial sector. The Committee also observed that since the national income did not support the payment of living wage. it should be implemented in three phases. In the initial stage the wages to be paid to the entire working class were to be established and stabilized. In the second phase fair wages were to be established in the community and industry. In the final phase the working class was to be paid the living wage.

Fair Wage:The concept of fair wage is linked with the capacity of the industry to pay. The Committee has defined fair wage as follows:

"Fair wage is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity of the industry to pay. "

Thus, fair wage depends on different variables affecting wage determination. Such factors are labor productivity prevailing wage rates, the level of national income and its distribution and the capacity of industry to pay.

At present, the concept of fair wages is followed by the most business organizations.

Methods of Wage Payment:

In devising system of wage determination, the critical question that emerges is whether the wage will be linked to time spent on the workplace or output achieved during a specified period. This results into two types of wages time wage and piece wage. These two basic systems have their own relative merits and demerits. Sometimes, in order to avoid hardship to employees, a combination of these two methods is followed to ensure the payment of minimum wages. This method is known as balance method. Let us see how these methods work.

Time Wage Method:In time wage method, the wage is determined on the basis of time worked which may be hourly, daily, weekly, monthly or any other time base. A worker is paid wage for the time worked irrespective of his output during that time. Perhaps, this is the oldest and most prevalent system of wage payment.

Merits of Time Wage:This method is applied more commonly because it has certain inherent merits which are as under:

There are certain jobs in which output within a specified period is not easily measurable. e.g. The job of a peon. In such a case wage payment is linked to time.

It is quite easy to understand and calculate the amount of wages to be paid. Thus, even an illiterate worker can understand it. Both employers and workers know well in advance the amount of wages payable and they can adjust their

budgets accordingly. It ensures the payment of regular and specific wages which is beneficial from social point of view. Product/service quality tends to be high as workers are not in hurry to produce more without regard to quality.

Demerits of Time Wage:Though adopted more commonly, time wage system suffers from a number of drawbacks and if the workers are not adequately motivated for higher performanceThis system can generate inefficiency in the following ways:

Since there is no direct linkage between performance and wages. Employees tend to take easy approach. This system does not differentiate between efficient and inefficient workers: gradually, inefficiency percolates to

efficient workers too. It demotivates efficient workers for more output as they are put at par with inefficient ones. Labor cost of production becomes difficult to determine in advance because wages are not linked to output. Since productivity is not a criterion for fixing wages. There is a possibility that wrong employees are placed on

the job.

Various merits and demerits of time wage system suggest that this system can be followed in some jobs but not in all. This system is more suitable in the following situations:

Where units of output are not measurable precisely like office work. Where individual employees do not have direct control on their outputs like assembly work. Where quality of work is more pronounced and requires creative imagination like artistic work. Where machinery and raw materials are quite sophisticated which require handling with utmost care like

processing of precious metals. Where work is of highly varied nature and standards of outputs cannot be ascertained like research work. Where workers' unions oppose the introduction of piece rate system. Where supervision is good and the supervisors can estimate a fair day's work.

Piece Wage Method:In piece wage method workers are paid wages according to the quantity of output during a specified period. This may be calculated on the basis of number of units produced or the completion of a job where output is not measurable in terms of individual units. Piece wage method too has its own merits and demerits.

Merits of Piece Wage:Piece wage method has the following merits:

There is a direct relationship between output and wages which works as a motivating factor to workers to produce more.

It differentiates efficient and inefficient workers and provides incentives to inefficient workers to become efficient. This is fair and equitable so far as utilization of human resources is concerned. It. requires less supervision if there is in-built system for product quality control. The organization can estimate its cost of production well in advance because wage cost is directly proportional to

output.

Demerits of Piece Wage:Piece wage system has the following demerits:

There is a problem in fixing piece rate in the absence of any standardized procedure. There is a tendency on the part of the employers to cut piece rate if workers' earnings are quite high. The method does not ensure minimum wages as output may be adversely affected by factors beyond control. The product quality and machinery conditions are likely to suffer because workers concentrate more on quantity

rather than quality. There may be jealousy and interpersonal conflict among workers because of their uneven earnings at the same

workplace. Trade unions generally oppose this system because of the fear of discrimination among workers based on their

working.

Various merits and demerits of piece wage system indicate that this system is not suitable for all conditions but only to specific conditions which are as follows:

Where the output of each individual worker can be measured precisely. Where the quantity of output is a direct result of skills and efforts of individual workers. When the flow of work is regular and work interruptions do not occur. Where production methods are standardized and job is of repetitive nature. Where workmanship is not required.

Balance Method:Balance method also known as debt method, is essentially a combination of time wage and piece wage methods. Under this method, a worker is guaranteed a fixed wage based on time rate with a provision of piece wage method. Thus, if a worker produces more quantity in a period, usually on weekly or monthly basis, and earns more than his time wage, he is given credit for additional output which is compensated in another period in which production quantity falls below the time wage.

This method provides a sense of security to a worker so far as his wage earning is concerned. At the same time, he is also motivated to produce more because of inclusion of piece wage system. This method has its relevance in a workplace where the work flow is irregular like docks.

Factors Affecting Wages:

On the basis of above discussion, we may summarize the factors affecting wage rates as under: Demand for and supply of labor: Demand and supply conditions of labor have considerable influence on the

determination of wage rates. If there is a short supply of labor, the wages may be high whereas if there is no dearth of labor, the wages tend to

be low. Labor unions: If the laborers are well organized into strong trade unions, their bargaining power would be high

and they can demand higher rates of wages. On the other hand, if the laborers are not organized, the management may fix low wages.

Cost of living: The cost of living of workers also has a strong influence on the rate of wages. If this factor is not considered, the laborers may not be in a position to make both ends meet and this will affect their efficiency. Hence progressive employers consider this factor also.

Prevailing wage rates: Prevailing wages in a particular industry are also taken into account by the employers while deciding wage levels for their employees. By considering the prevailing wage level, employers will come reasonable close to the wage level of competitors, and this will enable them to retain and attract qualified workers to the organizations.

Ability to pay: The wage level, to a large extent, is determined by the ability of the enterprise to pay its workers. The ability to pay in turn is determined by the profit-earning capacity of the enterprise.

Job requirements: Job requirements are also an important factor affecting wages. Jobs requiring specialized knowledge or involving much mental or manual effort are priced higher than those which are light or which do not need any specialized knowledge.

State regulation: State regulation is another important factor influencing wage rtes. As the State assumes responsibility for safeguarding the interest of citizens, it has to step in to regulate the wage rates of laborers through legislative measures.

Increment system: In some organizations wages automatically increase annually at a prescribed rate without any relation to workers’ performance. In some other organizations annual increases based on merit. Thus, the prevailing system of granting increments also affects wages.

Incentives:

‘Incentive’ may be defined as any reward of benefit given to the employee over and above his wage or salary with a view to motivating him to excel in his work. Incentives include both monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate individual or group performance.

The following are some of the definitions of the term ‘Incentive’: Wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the

person, over and above the time rated remuneration, for improvements in the present or targeted results” – The National Commission on Labor.

“It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job” –Hummel and Nickerson.

“It is any formal and announced programme under which the income of an individual, a small group, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity output” – Scott.

Need for incentive:

It is true that monetary compensation does constitute very important reason for the working of an employee. But this compensation alone cannot bring job satisfaction to the workers. One cannot expect effective performance from a worker who is dissatisfied with its job, even if he is well paid. Sociologists and industrial psychologists also view that the financial aspect is not the only dominant motivating force. Confidence in the management, pride in the job and in firm and concern for the overall good cannot be brought by a bonus. Hence the modern authorities on management science have recognized the need for the provision of incentives to build up good morale.

Incentives for work:

Incentives can take any form. According to Z. Clark Dickinson the important incentives for work can be listed as follows: Desire for livelihood and fear of want. Desire for approval of master and fear of punishment. Desire for praise and fear of being dismissed. Impulse to activity or joy in work and dislike of inactivity. The moral command and fear of conscience.

Robert E. Salton has mentioned the following nine factors as the Motives for work. Doing something worthwhile (Good). Trust in leadership. Doing my share (Participation) I count for something (Recognition). A decent living (Fair Wages). A chance to get somewhere (Opportunity). A safe future (Security). Know what’s going on (Communication). Conditions at work (Environment)

Classification of Incentives:

All forms of incentives can be broadly classified into two kinds namely, Financial Incentives, and Non-financial Incentives.

Financial IncentivesFinancial incentives or pecuniary incentives are the most original of all the incentives. It is given in the form of money. The financial incentives still form the most important influencing and motivating factor up to a certain limit. Because it is only by virtue of the monetary compensation that the workers can satisfy their fundamental needs such as food, clothing, shelter etc. The financial incentives may be either direct or indirect. Direct incentives include wages, bonus and other incentives directly given to the workers in the form of cash.Indirect financial incentives include subsistence allowance expenses, medical expenses etc.

Non-financial incentives:Non-financial or non-pecuniary incentives include all other influences planned or unplanned, which stimulate exertion. Mere monetary incentive cannot help the management in solving all the problems of industrial unrest.Further additional cash wage may also tempt the workers to misuse the money in vices like gambling, drinking etc. Under such circumstances, the nonfinancial incentives have a significant role to play. Such incentives create a healthy atmosphere and change the mental outlook of the workers. They make the working class more stabilized and economically sound. Thus, in short, the workers by virtue of the non-financial incentives are enabled to enjoy a richer and fuller life. Experiences of foreign countries particularly countries like Britain, America and Japan have shown that there is a high degree of positive correlation between non-financial benefit schemes and labor productivity.

Non-Financial Incentives can take a variety of forms. Some of the popular ones are given below:

Job Security:The management must try its best to create a sense of job security. There should be no risk of retrenchment, demotion

and termination. Experiences have also shown that the productivity is less in those concerns where workers have no feeling of safe and secure. But it is high in those concerns where they have a feeling of job security.

Recognition:Recognition of work is the essence of securing good work. Efficient people would naturally like to get recognition for their skill and excellence in their work. Such recognition can do many things that what a cash reward can do. Of course it is not practicable for the superiors to praise everybody for every thing done by them. But the technique of praise must be practiced as far as possible.

Participation:Workers feel more satisfied when they are given an opportunity to raise their voice in handling the affairs of the enterprise. Since they actually take part in the decision-making their co-operation is assured.

Sincere Interest in Subordinates as Individual Persons:The workers must be made to feel pride in their job. Various techniques can be employed to develop pride to work. Food products, dynamic leadership, fair treatment, ethical conduct etc. can effectively stimulate the workers’ pride in their job and in the firm.

Pride in job:The workers must be made to feel pride in their job. Various techniques can be employed to develop pride to work. Food products, dynamic leadership, fair treatment, ethical conduct etc. can effectively stimulate the workers pride in their job and in the firm.

Delegation of Responsibility:Delegation of rights and responsibilities to execute a given task often proves to be a strong motivating factor. By delegation the superior trusts his workers and stimulates them to show better results.

Other Incentives:Other incentives like quick promotion, provisions of facilities for development and training, provision of labor welfare amenities etc. also have a significant role to play in motivating the employees.

Merits of Incentives:

The following are the advantages derived by providing incentives to employees:

Higher output:By providing incentives to his employees, the employer is able to induce them to work better. This leads to higher output.

Greater profits:Needless to say, higher output results in greater profits for the business. This happens in two ways. First, the cost per unit becomes less and second, the enterprise is able to keep the selling price low and this result in greater sales.

No problem of idle time:In an organization where no proper incentives are available for the workers, the tendency will be to while away the time. When suitable incentives are available, the workers become time conscious. They begin to see every minute in terms of money.

Supervision does not pose any problem:When suitable incentives are available, the workers become duty conscious. The need for close supervision, thus, does not arise.

Efficient workers are able to earn more:Such of those workers who are highly efficient are able to earn more by way of performance bonus, higher commission and so on.

Possible to identify inefficient and dull workers:If, in spite of the incentive schemes, some workers are able to earn only their normal wage, it should mean that they are basically dull. The employer, therefore, has to decide whether to retain them or subject them to rigorous training.

Rate of labor turnover is bound to be low:If adequate incentives are available to the workers, they may not have a feeling of dissatisfaction. Such workers are sure to have greater work commitment and therefore may not leave the organization. The rate of labor turnover, as a result, is bound to be low.

Reduction in complaints and grievances:As the organization makes available suitable incentives to the workers, they may not have anything to complain about. This leads to reduction in complaints and grievances.

Problems arising out of incentives:

The following problems are bound to arise while implementing an incentive plan:

Quality of work may suffer:The workers, those in the production department in particular, may give undue importance to the quantity of output produced neglecting the quality of output. Such a problem can be overcome only if the organization has a perfect system of quality control.

Inter-personnel relationships may suffer:Only those employees who are really efficient will be benefited out of incentives. This may promote ill feelings among the employees of an organization.

Wear and tear of machines may be more:As the employees are keen on increasing the output all the time, they may handle the machines carelessly. This increases the wear and tear of machines.

Health of the workers may get affected:Some workers tend to overwork in order to earn more and this may affect their health.

Increase in accidents:There is always a preference to step up output disregarding even safety regulations and this may increase the rate of accidents in the workplace.

Increase in paper work:Proper administration of any incentive scheme involves lot of paper work. It necessitates the maintenance of proper records and books.

Requirements of a sound incentive plan:

A good incentive plan shall fulfill the following requirements:

Trust and confidence:The success of any incentive plan depends on the existence of an atmosphere of trust and confidence between the workers and the management. In the absence of such an atmosphere, the workers may resist any such proposal by the management.

Consensus required:The management should not take a unilateral decision while evolving an incentive scheme. Consensus between the workers and the management is necessary for the success of the plan.

Assured minimum wage:Payment to any worker should not be totally related to his performance. Every worker should be assured of a minimum wave notwithstanding performance. Only then the workers would have a sense of security.

No scope for bias or favoritism:The standards set under the incentive plan should be based on objective analysis. It should not expect too much out of the employee nor should it give scope for bias or favoritism.

Simple to operate:The incentive plan should not involve tedious calculations. It should be so simple that the worker will be in a position to work out his total earnings himself.

Beneficial to both the workers and the management:The incentive plan should be beneficial to both the workers and the management. From the management's point of view, it should be cost effective. From the workers' point of view, it should offer return, at a rate higher than the normal rate of wages, for the extra efforts made by them.

Sound system of evaluation:A perfect system of evaluating the employee’s performance should be created in the organization. The results of evaluation should be made known to the employees at the earliest.

Redressing grievances:Grievances and complaints are bound to arise whenever any incentive plan is in vogue in the organization. Proper machinery should be installed for the quick handling of all such complaints.

Review:The progress of the incentive scheme should be periodically reviewed. Only then it would be possible to notice and remove defects, if any, in the plan.

Fringe Benefits:

The fringe benefits are categorized as follows: Payment for Time Not worked: Benefits under this category include: sick leave with pay, vacation pay, paid rest

and relief time, paid lunch periods, grievance time, bargaining time, travel time etc. Extra Pay for time Worked: This category covers the benefits such as: premium pay, incentive bonus, shift

premium, old age insurance, profit sharing, unemployment compensation, Christmas bonus, Deewali or Pooja bonus, food cost subsidy, housing subsidy, recreation.

Organizations provide a variety of fringe benefits. The fringe benefits are classified under four heads as given here under:

Employment Security:Benefits under this head include unemployment, insurance, technological adjustment pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs to the sons/daughters of the employees and the like.

Health Protection:Benefits under this head include accident insurance, disability insurance, health insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

Old Age and Retirement:Benefits under this category include: deferred income plans, pension, gratuity, provident fund, old age assistance, old age counseling, and medical benefits for retired employees, traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the like.

Personnel Identification, Participation and Stimulation:This category covers the following benefits: anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilities, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational programs, stress counseling, safety measures etc.

Employee Security:Physical and job security to the employee should also be provided with a view to promoting security to the employee and his family members. The benefit of confirmation of the employee on the job creates a sense of job security. Further a minimum and continuous wage or salary gives a sense of security to the life.

Retrenchment Compensation:The Industrial Disputes Act, 1947 provides for the payment of compensation in case of lay-off and retrenchment. The non-seasonal industrial establishments employing 50 or more workers have to give one month’s notice or one month’s wages to all the workers who are retrenched after one year’s continuous service. The compensation is paid at the rate of 15 days wage for every completed year of service with a maximum of 45 days wage in a year. Workers are eligible for compensation as stated above even in case of closing down of undertakings.

Lay-off Compensation:In case of lay-off, employees are entitled to lay-off compensation at the rate to 50% of the total of the basic wage and dearness allowance for the period of their lay-off except for weekly holidays. Lay-off compensation can normally be paid up to 45 days in a year.

Safety and Health:Employee’s safety and health should be taken care of in order to protect the employee against accidents, unhealthy working conditions and to protect worker’s capacity. In India, the Factories Act, 1948, stipulated certain requirements regarding working conditions with a view to provide safe working environment. These provisions relate to cleanliness, disposal of waste and effluents, ventilation and temperature, dust and fume, artificial humidification, over-crowding, lighting, drinking water, latrine urinals, and spittoons. Provisions relating to safety measures include fencing of machinery, work on or near machinery in motion, employment of young persons on dangerous machines, striking gear and devices for cutting off power, self-acting machines, easing of new machinery, probation of employment of women and children near cotton openers, hoists and lifts, lifting machines, chains ropes and lifting tackles, revolving machinery, pressure plant, floors, excessive weights, protection of eyes, precautions against dangerous fumes, explosive or inflammable dust, gas etc. Precautions in case of fire, power to require specifications of defective parts of test of stability, safety of buildings and machinery etc.

Objectives of Fringe Benefits:

The view point of employers is that fringe benefits form an important part of employee incentives to obtain their loyalty and retaining them. The important objectives of fringe benefits are:

To create and improve sound industrial relations To boost up employee morale. To motivate the employees by identifying and satisfying their unsatisfied needs.

To provide qualitative work environment and work life. To provide security to the employees against social risks like old age benefits and maternity benefits. To protect the health of the employees and to provide safety to the employees against accidents. To promote employee’s welfare by providing welfare measures like recreation facilities. To create a sense of belongingness among employees and to retain them. Hence, fringe benefits are called golden

hand-cuffs. To meet requirements of various legislations relating to fringe benefits.

Need for Extending Benefits to Employees:

Rising prices and cost of living has brought about incessant demand for provision of extra benefit to the employees.

Employers too have found that fringe benefits present attractive areas of negotiation when large wage and salary increases are not feasible.

As organizations have developed ore elaborate fringe benefits programs for their employees, greater pressure has been placed upon competing organizations to match these benefits in order to attract and keep employees.

Recognition that fringe benefits are non-taxable rewards has been major stimulus to their expansion. Rapid industrialization, increasingly heavy urbanization and the growth of a capitalistic economy have made it

difficult for most employees to protect themselves against the adverse impact of these developments. Since it was workers who are responsible for production, it was held that employers should accept responsibility for meeting some of the needs of their employees. As a result, some benefits-and-services programs were adopted by employers

The growing volume of labor legislation, particularly social security legislation, made it imperative for employers to share equally with their employees the cost of old age, survivor and disability benefits.

The growth and strength of trade unions has substantially influenced the growth of company benefits and services.

Labor scarcity and competition for qualified personnel has led to the initiation, evolution and implementation of a number of compensation plans.

The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting from increasing industrialization should go, at least partly, to the employees who are responsible for it, so that they may be protected against the insecurity arising from unemployment, sickness, injury and old age. Company benefits-and-services programs are among some of the mechanisms which managers use to supply this security.

Flexible Benefits:

What are Flexible Benefits?

Flexible benefits allows allow employees to pick benefits that most their needs. The idea is to allow each employee to choose a benefit package that is individually tailored to his or her own needs and situation. It replaces the traditional “one-benefit-plan-fits-all” programs that dominated organizations for more than 50 years.

The average organization provides fringe benefits worth approximately 40% of an employee’s salary. Traditional benefit programs were designed for the typical employees of the 1950s—- a male with wife and two children at home. Less than 10% of employees now fit this stereotype. While 25% of today’s employees are single, a third are part of two-income families with no children. As such these traditional programs don’t tend to meet the needs of today’s more diverse workforce. Flexible benefits, however, do meet these diverse needs. They can be uniquely tailored to reflect differences in employee needs based on age, marital status, spouses’ benefit status, number and age of dependents, and the like.

The three most popular type of benefit plans are modular plans, core-plus options, and flexible spending accounts. Modular plans are pre-designed packages of benefits, with each module put together to meet the needs of a specific group of employees. So a module designed for single employees with no dependents might include only essential benefits. Another, designed for single parents, might have additional life insurance, disability insurance, and expanded health coverage.

Core-plus plans consist of a core of essential benefits and a menu-like selection of other benefits options from which employees can select and add to the core. Typically, each employee is given “benefit credits,” which allow the “purchase”

of additional benefits that uniquely meet his or her needs. Flexible spending plans allow employees to set aside up to the dollar amount offered in the plan to pay for particular services. It’s a convenient way, for example, for employees to pay for health-care and dental premiums. Flexible spending accounts can increase employee take-home pay because employees don’t have to pay taxes on the dollars they spend out of these accounts.

Linking Flexible Benefits and Expectancy Theory:Giving all employees the same benefits assumed that all employees have the same needs. Of course we know that assumption is false. Thus, flexible benefits turn the benefit expenditure into a motivator.Consistent with expectancy theory’s thesis that organizational rewards should be linked to each individual employees goals, flexible benefits individualized rewards by allowing each employ to choose the compensation package that best satisfies his or her current needs.

Flexible Benefits in Practice:Today almost all major Corporations in the United States offer Flexible benefits. And they are becoming a norm in other countries too. For instances a recent survey of 136 Canadian Organizations found that 93% have adopted flexible benefits or will in the near term. And a similar survey of 307 firms in the United Kingdom found that while only 16% have flexible benefits programs in place, another 60% are either in the process of implementing them or are seriously considering them. In India and most countries of Asia with the exception of Japan Flexible benefits are not offered by employers for various reasons which may create personnel and trade union problems.. In India some flexible benefits are offered in a limited way to the top management personnel like Executive Directors, President, Vice President, General Manager etc., It may take a few more years to offer flexible benefits to employees in India and other Asian counties by the managements.

401k Compensation system:

There are two main types of employer-sponsored retirement plans: defined benefit and defined contribution. A defined benefit plan, such as a traditional pension plan, sets the amount that the employer will pay to workers upon their retirement. In defined contribution plans, the plan sets the amount of the contributions that an employer makes, not the benefit it will pay at retirement. In 1978, section 401(k)of the Internal Revenue Code authorized a new kind of defined contribution plan that allows the employee to make pre-tax contributions to the plan.

In a 401(k) plan, the employer sets up a special savings and investment account with an investment company, a bank trust dept, or an insurance company. The employee agrees to put part of his or her salary into the plan through automatic deductions each pay period. This money is deducted before the employee’s paycheck is taxed, so that it remains untaxed until it is taken out of the plan, often years or even decades later.

Employers frequently match employee contributions up to a certain level, sometimes by as much as 100 percent, but are not required to do so. The money in the plan is invested into one or more funds provided in the plan according to choices made by the employee. The plans usually are intended to earn money over a very long period of time, which is much less risky than short-term investing.

Employees like 401(k) plans for several reasons. The tax deferral an obvious plus. Others popular features include the increased portability of this plan from one employer to another, the matching contributions, and the sense of control due to the ability to choose one’s own investments.

Objectives of Compensation Management:

The basic objective of compensation management can be briefly termed as meeting the needs of both employees and the organization. Since both these needs emerge from different sources, often, there is a conflict between the two.

This conflict can be understood by agency theory which explains relationship between employees and employers. The theory suggests that employers and employees are two main stakeholders in a business unit, the former assuming the role of principals and the latter assuming the role of agents. The compensation paid to employees is agency consideration. Each party to agency tries to fix this consideration in its own favor. The employers want to pay as little as possible to keep their costs low. Employees want to get as high as possible. The compensation management tries to strike a balance between these two with following specific objectives:

Attracting and Retaining Personnel:From organization’s point of view, the compensation management aims at attracting and retaining right personnel in theorganization. In the Indian corporate scene, there is no dirth of personnel at operative levels but the problems come at the managerial and technical levels particularly for growing companies. Not only they require persons who are well qualified but they are also retained in the organization. In the present day context, managerial turnover is a big problem particularly in high knowledge based organizations.

Motivating Personnel:Compensation management aims at motivating personnel for higher productivity. Monetary compensation has its ownlimitations in motivating people for superior performance. Alfie Kohn has gone to the extent of arguing that corporate incentive plans not only fail to work as intended but also undermine the objectives they intend to achieve. He argues that this is due to inadequate psychological assumptions on which reward systems are based. His conclusions are as follows:

Rewards punish people-their use confirms that someone else is in control of the employee. Rewards rupture relationships-they create competition where teamwork and collaboration are desired. Rewards ignore reasons-they relieve managers from the urgent need to explore why an employee is effective or

ineffective. Rewards discourage risk taking-employees tend to do exactly what is required to earn the reward, and not any

more. Rewards undermine interest-they distract both manager and the employee from consideration of intrinsic

motivation.Notwithstanding these arguments, compensation management can be designed to motivate people through monetary compensation to some extent.

Optimizing Cost of Compensation:Compensation management aims at optimizing cost of compensation by establishing some kind of linkage withperformance and compensation. It is not necessary that higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries.Compensation management tries to attempt at this.

Consistency in Compensation:Compensation management tries to achieve consistency-both internal and external-in compensating employees.Internal consistency involves payment on the basis of criticality of jobs and employees' performance on jobs. Thus, higher compensation is attached to higher-level jobs. Similarly, higher compensation is attached to higher performers in the same job. Level of jobs within an organization is determined by job evaluation which will be discussed little later in this chapter. External consistency involves similar compensation for a job in all organizations. Though there are many factors involved in the determination of wage and salary structure for a job in an organization which may result into some kind of disparity in the compensation of a particular job as compared to other organizations, compensation management tries to reduce this disparity.

Compensation Management Process:

In order to achieve the objectives of compensation management, it should proceed as a process. This process has various sequential steps as shown:

Organization’s strategy Compensation policy Job analysis and evaluation Analysis of contingent factors Design and implementation of compensation plan Evaluation and review

Organization’s Strategy:Organization’s overall strategy though not a step of compensation management is the starting point in the total human resource management process including compensation management. Companies operating in different types of market/product having varying level of maturity, adopt different strategies and matching compensation strategy and blend of different compensation methods. Thus, it can be seen that organizations follow different strategies in different market situations and align their compensation strategy and contents with these strategies. In a growing market, an organization can expand its business through internal expansion or takeover and merger of other organizations in the same line of business or a combination of both. In such a growing market, the inputs, particularly human resources, do

not grow in the same proportion as the business expands. Therefore, in order to make the growth strategy successful, the organization has to pay high cash to attract talents. For example, information technology is a fast growing business presently and we find maximum merger and higher managerial compensation in this industry. In mature market, the organization does not grow through additional investment but stabilizes and the growth comes through making the present investment more effective, known as learning curve growth. In such a situation, average cash and moderate incentives may work. The benefits which have been standardized have to be maintained. In the declining market, the organization has to harvest profit through cash generation and cost cutting and if this cannot be sustained over the long run, the possible retrenchment of business to invest somewhere else. In such a case, compensation strategy involves cost control with below average cash and incentive payments. Cascio has observed that in viewing the compensation from strategic point of view, the companies do the following:

They recognize remuneration as a pivotal control and incentive mechanism that can be used flexibly by the management to attain business objectives.

They make the pay system an integral part of strategy formulation. They integrate pay considerations into strategic decision-making processes, such as those that involve planning

and control. They view the company's performance as the ultimate criterion of the success of the strategic pay decisions and

operational remuneration programmes.

Compensation Policy:Compensation policy is derived from organizational strategy and its policy on overall human resource management. In order to make compensation management to work effectively, the organization should clearly specify its compensation policy, which must include the basis for determining base compensation, incentives and benefits and various types of perquisites to various levels of employees. The policy should be linked with the organizational philosophy on human resources and strategy. Besides, many external factors which impinge on the policy must also be taken care of Job Analysis and Evaluation. Job analysis provides basis for defining job description and job specification with the former dealing with various characteristics and responsibilities involved in a job and the latter dealing with qualities and skills required in job performer. Job analysis also provides base for job evaluation which determines the relative worth of various jobs in the organization. The relative worth of various jobs determines the compensation package attached with each job.

Analysis of Contingent Factors:Compensation plan is always formulated in the light of various factors, both external and internal, which affect the operation of human resource management system. Various external factors are conditions of human resource market, cost of living, level of economic development, social factors, pressure of trade unions and various labor laws dealing with compensation management. Various internal factors are organization’s ability to pay and employees' related factors such as work performance, seniority, skills, etc. These factors may be analyzed through wage/salary survey. The impact of these factors will be discussed later.

Design and Implementation of Compensation Plan:After going through the above steps, the organization may be able to design its compensation plan incorporating base compensation with provision of wage/salary increase over the period of time, various incentive plans, benefits and perquisites. Sometimes, these are determined by external party, for example, pay commissions for Government employees as well as for public sector enterprises. After designing the compensation plan, it is implemented. Implementation of compensation plan requires its communication to employees and putting this into practice.

Evaluation and Review:A compensation plan is not a rigid and fixed one but is dynamic since it is affected by a variety of factors which are dynamic.Therefore, compensation management should have a provision for evaluating and reviewing the compensation plan. After implementation of the plan, it will generate results either in terms of intervening variables like employee satisfaction and morale or in terms of end-result variable like increase of productivity. However, this latter variable is more important. The evaluation of compensation plan must be done in this light. If it does not work as intended, there should be review of the plan necessitating a fresh look.

Designing and Developing the Compensation Plan:

Develop a program outline: Set an objective for the program.

Establish target dates for implementation and completion. Determine a budget.

Designate an individual to oversee designing the compensation program: Determine whether this position will be permanent or temporary. Determine who will oversee the program once it is established. Determine the cost of going outside versus looking inside. Determine the cost of a consultant's review.

Develop a compensation philosophy: Form a compensation committee (presumably consisting of officers or at least including one officer of the

company). Decide what, if any, differences should exist in pay structures for executives, professional employees, sales

employees, and so on (e.g., hourly versus salaried rates, incentive-based versus non-contingent pay). Determine whether the company should set salaries at, above, or below market. Decide the extent to which employee benefits should replace or supplement cash compensation.

Conduct a job analysis of all positions: Conduct a general task analysis by major departments. What tasks must be accomplished by whom? Get input from senior vice presidents of marketing, finance, sales, administration, production, and other

appropriate departments to determine the organizational structure and primary functions of each. Interview department managers and key employees, as necessary, to determine their specific job functions. Decide which job classifications should be exempt and which should be nonexempt. Develop model job descriptions for exempt and nonexempt positions and distribute the models to incumbents for

review and comment; adjust job descriptions if necessary. Develop a final draft of job descriptions. Meet with department managers, as necessary, to review job descriptions. Finalize and document all job descriptions.

Evaluate jobs: Rank the jobs within each senior vice president's and manager's department, and then rank jobs between and

among departments. Verify ranking by comparing it to industry market data concerning the ranking, and adjust if necessary. Prepare a matrix organizational review. On the basis of required tasks and forecasted business plans, develop a matrix of jobs crossing lines and

departments. Compare the matrix with data from both the company structure and the industry wide market. Prepare flow charts of all ranks for each department for ease of interpretation and assessment. Present data and charts to the compensation committee for review and adjustment.

Determine grades: Establish the number of levels - senior, junior, intermediate, and beginner - for each job family and assign a grade

to each level. Determine the number of pay grades, or monetary range of a position at a particular level, within each

department.

Establish grade pricing and salary range: Establish benchmark (key) jobs. Review the market price of benchmark jobs within the industry. Establish a trend line in accordance with company philosophy (i.e., where the company wants to be in relation to

salary ranges in the industry).

Determine an appropriate salary structure: Determine the difference between each salary step. Determine a minimum and a maximum percent spread. Slot the remaining jobs. Review job descriptions. Verify the purpose, necessity, or other reasons for maintaining a position.

Meet with the compensation committee for review, adjustments, and approval.

Develop a salary administration policy: Develop and document the general company policy. Develop and document specific policies for selected groups. Develop and document a strategy for merit raises and other pay increases, such as cost-of-living adjustments,

bonuses, annual reviews, and promotions. Develop and document procedures to justify the policy (e.g., performance appraisal forms, a merit raise

schedule). Meet with the compensation committee for review, adjustments, and approval.

Obtain top executives' approval of the basic salary program: Develop and present cost impact studies that project the expense of bringing the present staff up to the proposed

levels. Present data to the compensation committee for review, adjustment, and approval. Present data to the executive operating committee (senior managers and officers) for review and approval.

Communicate the final program to employees and managers: Present the plan to the compensation committee for feedback, adjustments, review, and approval. Make a presentation to executive staff managers for approval or change, and incorporate necessary changes. Develop a plan for communicating the new program to employees, using slide shows or movies, literature,

handouts, etc. Make presentations to managers and employees. Implement the program. Design and develop detailed systems, procedures, and forms. Work with HR information systems staff to establish effective implementation procedures, to develop

appropriate data input forms, and to create effective monitoring reports for senior managers. Have the necessary forms printed. Develop and determine format specifications for all reports. Execute test runs on the human resources information system. Execute the program.

Monitor the program: Monitor feedback from managers. Make changes where necessary. Find flaws or problems in the program and adjust or modify where necessary.