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Compensation
Management
Module IProf. Neha Walia
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Module I: Overview of Compensation
Management
Nature, mportance & bjective of ompensation anagement
Philosophy, cope and wage concepts
Principles & achinery for wage determination
Management hinkers & critical evaluation Acts related to ompensation management
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Introduction :Human Resource Management
The most important "products" in today's economy
are services provided by people; there is, therefore,considerable interest in the field of human resources.
By gaining an understanding of appropriate principles
and procedures, strategies can be developed to meetthe human resource management challenge presented
by reinvention initiatives.
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Need for Compensation Management aswell as Management of Change:
(a)T
he managerial environment,(b) The acquisition, allocation, development, and
sanction of human resources, and
(c) hange and the future.
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Major Concepts:
1. Compensation
2. Rewards
3. Incentives
4. Benefits
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Do we all need rewards and
incentives to be motivated forwork?
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Motivation is very personal and stems primarily
from the interaction between an employee and his or
her manager.
What is motivating to an individual also varies from
person to person.
The best motivation comes from daily positive
reinforcement by management of desired performance
with as many employees as possible - not something
that occurs once a month for a single employee.
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Compensation ManagementWhat is Compensation?
T
he word ompensation means something, such asmoney, given or received as payment or reparation, as
for a service or loss.
Compensation may be defined as, Money received
in the performance of work, plus the many kinds ofbenefits and services that organizations provide their
employees.
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Types of Compensation :Compensation can be classified into:
(1) Direct compensation.
(2) indirect compensation.
Money (popularly known as basic salary or wage, i.e. gross pay)
is included underDirect Compensation
Benefits (life, accident, and health insurance, the employerscontribution to retirement (pensions), pay for vacation or illness,
and employers required payments for employee welfare as social
security, etc.) come underIndirect Compensation.
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To establish and maintain an equitable compensation
structure.
The establishment and maintenance of an equitable
labor-cost structure, an optimal balancing of conflicting
personnel interests so that the satisfaction of employees
and employers is maximized and conflicts minimized.
Basic purpose for establishment of a soundCompensation and Reward administration
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Objectives of Compensation Management
1. Incentives
- Performance
- Job assignments
- Retention
- Training
2. Cost3. Fairness
4. Legal compliance
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(a) For Employees:
(1) mployees are paid according to requirements of their
jobs, i.e., highly skilled jobs are paid more compensation
than low skilled jobs. This eliminates inequalities.
(2) The chances of favoritism (which creep in when wage
rates are assigned) are greatly minimized.
(3) Job sequences and lines of promotion are established
wherever they are applicable.
(4) mployees' morale and motivation are increased because a
wage programme can be explained and is based upon facts.
Objectives of a sound CompensationManagement Plan:
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(b) For Employers:
(1) They can systematically plan for and control their labor costs.
(2) n dealing with a trade union, they can explain the basis of their
wage programme because it is based upon a systematic analysis
of job and wage facts.
(3) A wage and salary administration reduces friction and
grievances over wage inequities.
(4) t enhances an employee's morale and motivation because
adequate and fairly administered wages are basic to his wants and
needs.
(5) t attracts qualified employees by ensuring and adequate
payment for all the jobs.
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(1) To recruit qualified personnel for a firm;
(2) Retain current employees
(3) To control payroll costs;
(4) Reward desired behavior
(5) To satisfy people to reduce the occurrence of quitting
grievances, and fractions over pay
(6) To motivate people to perform better.
(7) Comply with legal regulations
(8) Further enhance administrative efficiency-making optimal
use of the HRIS
Other Objectives of Compensation Management
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Components of employee remuneration
Remuneration
Financial Non-financial
Basic wagesIncentives,
Individual plans
Group plans
Fringe benefits
P.F.
Medical care
Accident relief
Health and
Group insurance
Perquisites
Car
Club membership
Paid holidays
Furnished house
Stock option scheme
Job context
Challenging job
Responsibilities
Growth prospects
SupervisionWorking conditions
Job sharing etc
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Components of compensation
Basic wages / Salaries:-
These refer to the cash component of the wage structure
based on which other elements of compensation may be
structured. t is normally a fixed amount which is
subject to changes based on annual increments or
subject to periodical pay hikes. t is structured based on
the position of an individual in the organization and
differs from grades to grades.
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Bonus:-
The bonus can be paid in different ways. t can befixed percentage on the basic wage paid annually orin proportion to the profitability. The overnment
also prescribes a minimum statutory bonus for allemployees and workers.
There is also a bonus plan which compensates the
Managers and employees based on the sales revenueor Profit margin achieved. Bonus plans can also be based on piece wages but depends upon theproductivity of labour.
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Commissions:-
Commission to Managers and employees may be based
on the sales revenue or profits of the company. t is
always a fixed percentage on the target achieved. Fortaxation purposes, commission is again a taxable
component of compensation.
The payment of commission as a component ofcommission is practiced heavily on target based sales.
Depending upon the targets achieved, companies may
pay a commission on a monthly or periodical basis.
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Dearness allowance:-
The payment of dearness allowance facilitates employeesand workers to face the price increase or inflation of pricesof goods and services consumed by him. The onslaught of
price increase has a major bearing on the living conditionsof the labour.
The increasing prices reduce the compensation to nothingand the money's worth is coming down based on the level
of inflation.
The payment of dearness allowance, which may be a fixedpercentage on the basic wage, enables the employees toface the increasing prices.
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Mixed plans:-
Companies may also pay employees and others a
combination of pay as well as commissions. This plan is
called combination or mixed plan. Apart from the salaries paid, the employees may be eligible for a fixed
percentage of commission upon achievement of fixed
target of sales or profits or Performance objectives.
Nowadays, most of the corporate sector is following this
practice. This is also termed as variable component of
compensation.
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Piece rate wages:-
Piece rate wages are prevalent in the manufacturing
wages.The laborers are paid wages for each of the
Quantity produced by them.T
he gross earnings of thelabour would be equivalent to number of goods produced
by them.
Piece rate wages improves productivity and is anabsolute measurement of productivity to wage structure.
The fairness of compensation is totally based on the
productivity and not by other qualitative factors.
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Sign-on Bonuses:-
The latest trend in the compensation planning is the
lump sum bonus for the incoming employee. A person
who accepts the offer, is paid a lump sum as a bonus.
ven though this practice is not prevalent in most of the
industries, quity research and investment banking
companies are paying this to attract the scarce talent.
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Profit sharing payments:-
Profit sharing is again a novel concept nowadays.This can be paid through payment of cash or through
P . The structuring of wages may be done insuch a way that, it attracts competitiveness andimproved productivity.
Profit sharing can also be in the form of deferredcompensation at the time of retirement. At the time ofretirement the employees may be paid a lump sum orretiral benefits.
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Fringe benefits:-
a) Company cars
b) Paid vacations
c) Membership of social/cultural clubs
d) ntertainment tickets/allowances.
e) Discounted travel tickets.
f) Family vacation packages.
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Reimbursements:-
Employees, depending upon their gradations in theorganization may get reimbursements based on theExpenses incurred and substantiated. Certain expensesare also paid based on expenses incurred during thecourse of business.n many cases, employers provides advances to the
employees for incurring certain expenses that areincurred during the course of the business.
Some examples of Reimbursements(a) Travel expenses.(b) Entertainment expenses(c) ut of pocket expenses(d) Refreshments expenses during office routine outside office
premises.
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Sickness benefits:-
The increasing social consciousness of corporate hadresulted in the payment of sickness benefit to theEmployees of companies. This also includes payments
during pregnancy of women employees.
The expenses incurred due to injury or illness arecompensated or reimbursed to the employees. n certaincompanies, the death of an employee is compensated
financially. Companies are also providing supportingfinancial benefits to the family of the deceased employees.
owever, companies cover these cost through appropriateinsurance policies like, Medical and life insurance.
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Influencing factors of Remuneration
Remuneration
External Internal
LabourMarket
Cost ofLiving
Labour nions
ovt. Legislations
ociety
Economy
Business trategy
Job evaluation & PA
The Employee
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Challenges of remuneration
Remuneration
Skills-based
pay
Employee
participation
Comparable
worth
Pay
secrecy
Salary
reviews
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Wages Vs SalaryWages
1. Quantum of service
can be measured2. Shorter Service
period
3. Payment based onactual production.
Salary
1. Quantum of service
cannot be measured2. Longer service
period
3. Paid uniformlygenerally onmonthly basis