UNIT –8 COMPENSATION MANAGEMENT

Structure
Learning Objectives
Introduction
Rewards and incentives Objectives
Types
Concept of Wages
Factors Influencing Compensation
Steps in Compensation Administration
Executive Compensation - Concept and Components
Retention strategies.
Summary
Key Words/Abbreviations
Learning Activity
Unit End Questions (MCQ and Descriptive)
References

LEARNING OBJECTIVES

After studying this unit, you will be able to:

 State objectives and types of rewards and incentives
 Discuss concept of wages
 Explain factors influencing compensation
 Outline steps in compensation administration
 Study concept and components of executive compensation
 Identify retention strategies

INTRODUCTION

One of the most difficult functions of human resource management is that of determining the rates of
monetary compensation. It is not only complex, but significant both to the organisation and employees.
Employee compensation decisions are crucial for the success of an organisation. From a cost
perspective alone, effective management of employee compensation is critical because of the total
operating costs. Another reason for studying compensation from the organisation’s perspective is to
assess its impact on a wide range of employee attitudes and behaviours and, ultimately the effectiveness
of the organisation and its units. Compensation may directly influence key outcomes like job
satisfaction, attraction, retention, performance, skill acquisition, cooperation, and flexibility
REWARDS AND INCENTIVES OBJECTIVES

Rewards and incentives in the workplace have benefits for both employees and employers. When
recognized for stellar performance and productivity, employees have increased morale, job satisfaction
and involvement in organizational functions. As a result, employers experience greater efficiency and
an increase in sales and productivity. Through workplace rewards and incentives, employers and
workers enjoy a positive and productive work environment.

Monetary Incentives Motivate

Monetary incentives reward workers for performance and productivity through money. These
incentives include employee stock options, profit sharing plans, paid time off, bonuses and cash awards.
Additional monetary incentives include annual or semi-annual bonuses, such as mid-year and end-of-
year rewards. These incentives encourage friendly competition between associates when linked to
job performance. Monetary rewards motivate employees to produce optimally.

Non-Monetary Opportunities

Non-monetary incentives reward employee performance through perks and opportunities. These
rewards include flexible work hours, training opportunities and the ability to work independently. The
rewards and incentives are valuable to an employee because they allow workers to learn new skills and
pursue advancement opportunities. For example, a recent graduate may view an exemplary training
program within an organization as more valuable than a higher base salary because he feels the learning
opportunity will benefit his career.

Employee Recognition Improves Morale

Employees who receive recognition for their work accomplishments tend to have increased morale and
positive workplace attitudes. Employee recognition is an incentive employer utilize to offer feedback
and encouragement to employees. Recognition rewards can include award ceremonies and public
announcements, her choice for the next assignment, and asking him to be a mentor to others. And don't
underestimate the power of a simple, sincere thank-you for a job well done. Workplace recognition
rewards occur frequently such as at the end of the day, week or at the conclusion of the sales month.

Employee Assistance Adds Balance

Many employers offer rewards and incentives through employee assistance programs. These programs
help workers maintain a balance between work and home life by supporting workers' mental and
physical well-being. For example, many programs provide counseling services to help cope with stress,
family issues and substance abuse.
Employee assistance programs also offer discounts to join fitness centers to encourage an active and
healthy lifestyle. Some programs help working parents find daycare and other activities for their
children. The purpose of these programs is to support workers with their home responsibilities so they
can remain focused on their jobs while they are at work. Small businesses can contract with an
employee assistance firm to provide the services that workers need.

TYPES OF COMPENSATION

Compensation is what employees receive in exchange for the services rendered in an organization. The
term ‘compensation’ refers to all forms of financial returns and tangible benefits that employees receive
as part of the employment relationship. In the era of globalization, where the business environment has
become increasingly complex and challenging, structuring an effective compensation package to
attract and retain talent is an important function of organizational effectiveness.
Compensation refers to as a wide range of financial and non-financial rewards given to employees for
their services rendered to the organization. It is paid in the form of wages, salaries and employee
benefits such as paid vacation, insurance, maternity leave, free traveling facility, retirement benefits,
etc.
Compensation can be classified into two categories:
1. Financial Compensation
2. Non-Financial Compensation

Financial Compensation:
Financial compensation is most popular and important compensation that is given in the form of
money. It is the most important motivational factor that satisfies employees’ basic needs like food,
clothing, etc.
It is further categorized into two parts:

I. Direct Compensation:
Direct compensation means compensating employees by paying them money in the following forms:
a. Wages-Wages means remuneration paid in cash for the work performed by an employee.
b. Bonus- Bonus means extra cash paid to an employee for exceeding his performance or on
completion of specified project or target.
Other financial incentives that are directly given to employees in the form of cash.

II. Indirect Compensation (Fringe Benefits):

Dessler refers to indirect compensation as the indirect financial and non- financial payments
employees receive for continuing their employment with the company which are an important part of
every employee’s compensation. Other terms such as fringe benefits, employee services,
supplementary compensation and supplementary pay are used.
Armstrong says indirect compensation or employee benefits are elements of remuneration given in
addition to the various forms of cash pay. They also include items that are not strictly remuneration
such as annual holidays.

Management uses it ostensibly to facilitate its recruitment effort or influence the potential of
employees coming to work for a company, influence their stay or create greater commitment, raise
morale, reduce absenteeism in general and improve the strength of the organization by instituting a
comprehensive programme in this area.

According to Chhabra, indirect or supplementary compensation involves ‘fringe benefits’ offered

through several employee services and benefits such as housing, subsidized food, medical aid,
creches and so on. It involves rewards provided by organizations to employees for their membership,
attendance or participation in the organization.

Because of the increasing costs of fringe benefits, some people also label them as ‘hidden payroll.’
Benefits currently account for almost 40 per cent of the total compensation costs for each employee.
The basic purpose of fringe benefits or supplementary compensation is to attract and maintain
efficient human resources within the organization and to motivate them.

Types of Indirect Compensation:

Below are some of the more popular indirect compensations offered by today’s organizations.

a. Social Security:
This is a federally administered insurance system. According to law, both employer and employee
must pay into the system, and a certain percentage of the employee’s salary is paid up to a maximum
limit. How much is paid by employer and employee is calculated on the average monthly wage
(weighted towards the later years). It is provided mainly to give financial security to employees when
they retire.

b. Workers’ Compensation:
It is meant to protect employees from loss of income and to cover extra expenses associated with job-
related injuries or illness. The laws generally provide for replacement of lost income, medical
expenses, rehabilitation of some sort of death benefits to survivors, and lump-sum disability
payments.

c. Retirement Plans:
Retirement and pension plans, which provide a source of income to people who have retired,
represent money paid for past services. Private plans can be funded entirely by the organization or
jointly by the organization and the employee during the time of employment.
One popular form of pension plan is the defined-benefit plan. Under this plan, the employer pledges
to provide a benefit determined by a definite formula at the employee’s retirement date. The other
major type of retirement plan is the defined contribution plan, which calls for a fixed or known
annual contribution instead of a known benefit.

d. Paid Holidays:
These comprise Christmas Day, New Year’s Day, Independence Day, Labour Day, etc. One
relatively new concept is the floating holiday, which is observed at the discretion of the employee or
the employer.
Another relatively new concept is referred to as personal time-off or personal days. Under this
concept, organizations give employees a certain number of days with pay to attend to personal affairs.
Normally these days can be taken at the employee’s discretion.

e. Paid Vacations:
Typically, an employee must meet a certain length-of-service requirement before becoming eligible
for paid vacation. The time allowed for paid vacations generally depends on the employee’s length of
service.
Unlike holiday policies that usually affect everyone in the same manner, vacation policies may differ
among categories of employees. Most organizations allow employees to take vacation by the day or
week but not in units of less than a day.

f. Other Benefits:
Organizations may offer a wide range of additional benefits, including food services, exercise
facilities, health and first-aid services, financial and legal advice, and purchase discounts. The extent
and attractiveness of these benefits vary considerably among organizations. For example, purchase
discounts would be especially attractive to employees of retail store or an airline.

Non-Financial Compensation:
Non-financial compensation refers to compensating employee not in form of money but in some
other forms that stimulate employees’ morale and also improve his performance.
It can be in the following forms:
 Job security
 Recognition
 Participation
 Pride in job
 Delegation of responsibility
 Other incentives

The basic types of compensation prevalent particularly in the Indian industries are:
(1) Basic pay,
(2) Dearness or cost of living allowance,
(3) Incentive payments,
(4) Performance-based remuneration,
(5) Bonus,
(6) Fringe benefits and miscellaneous cash allowances.

Type 1. Basic Pay:

Basic pay universally constitutes the most important component of compensation. However, there are
variations in the manner in which basic pay is determined and paid. It may be on daily, weekly or
monthly basis. In India, under the Minimum Wages Act, 1948, both the central and state
governments have fixed minimum daily rates of wages for a large number of sweated employments.

In the U.S.A., U. K. and France, there has been the practice of fixing hourly rates of wages for
several categories of workers. In the organised sectors in India, the practice of prescribing monthly
basic rates of wages under wage scales with provision of annual increments is widely prevalent.

Basic wages are significant for workers for a variety of reasons. Generally speaking, most other cash
allowances made available to workers, such as dearness allowance, house rent allowance, city
compensatory allowance, medical allowance and so on, are linked with the quantum of basic wages.
Besides, contributions to social security funds such as provident and pension funds, gratuity and
certain cash allowances are often linked to basic wages.

The quantum of basic pay is also taken into account in determining the scales of certain fringe
benefits, such as housing accommodation, and travelling and leave travel allowances. Overtime
payments for additional hours worked are also usually based on basic pay.

Type 2. Dearness or Cost of Living Allowance:

Dearness allowance or cost of living allowance, separate and distinct from basic pay, has been an
important component of compensation in industrial and governmental employments in India and a
number of Asian countries. The basic purpose behind the provision of dearness allowance is to offset
the rise in prices of consumption goods and to protect the real wages from being encroached by price
rise.

Starting during the Second World War period on a temporary and experimental basis, the system has
become a permanent feature of the wage structure in Indian industries and governmental and semi-
governmental employments.
In general, the quantum of dearness allowance payable to industrial workers as well as government
and semi-government employees is linked with the fluctuations in the Consumer Price Index
Numbers for industrial workers worked out by Labour Bureau, Ministry of Labour, and Government
of India, which has been engaged in the task since 1946.

The specific schemes for the determination of D.A. have considerably varied from time to time. In its
earliest form, flat rates on a graduated basis without any linkage to CPI numbers were prevalent.
Subsequently, calculation of D.A. came to be made with reference to rise or fall in the CPI numbers
calculated by either the central or state governments.

Initially, the percentage of neutralisation for the rise in prices was higher in low wage brackets
tapering off gradually when wages rose. Later, a more or less consistent formula providing for
neutralisation for rise in prices on a common percentage basis emerged for government and semi-
government employees. However, the industrial establishments have their own separate schemes
generally worked out on the basis of negotiations.

In many countries such as the U.S.A. and Australia, there are schemes of automatic revision of basic
rates of pay when prices rise above the specified level. Many collective agreements in the U.S.A.
contain escalator clauses to avoid frequent bargaining for revision of wage rates.

Type 3. Incentive Payments:

In a number of industrial undertakings, employees are in receipt of incentive payments. These
incentive schemes are generally directly related to the quantum, and in some cases, to the quality of
goods produced by individual employees or a group of them. The specific schemes vary from
organisation to organisation, and with different sets of employees in the same organisation.

There are schemes, such as the straight piece-rate system, in which the earnings of employees vary in
the same proportion as increase in output. In many schemes, incentive payments are lower than the
proportion of increase in output. There are also schemes in which incentive payments are higher in
proportion to the increase in output. In a number of schemes, incentive payments vary in different
proportions at different levels of output. Performance-based remuneration described below may also
be considered incentive payment.

Type 4. Performance-Based Remuneration:

During more recent years, especially after the onset of globalisation and competition, many
categories of employees, particularly managerial and supervisory personnel, have been receiving
performance- based remuneration.
Such a remuneration is worked out on the basis of the outcome of performance appraisal of
individual employees, which takes into account the level of their performance in such areas as extent
of improvement in the quantity and quality of products or services, acquisition of skills and
capabilities, regularity of attendance, relationship with co-employees, capacity to face challenging
situations and extent of commitment to work.

The specific schemes of performance appraisal vary from organisation to organisation and different
sets of personnel in the same organisation. Based on performance appraisals, individual employees
are allotted specific grades, and are remunerated and given inducements based on their performance.
Performance appraisal also constitutes key to decisions in other areas of HRM such as promotion,
transfer, demotion and even separation.

Type 5. Bonus:
Employees in a large number of industrial establishments in India have been in receipt of profit-
sharing bonus. Initially, the practice of giving bonus to industrial workers started on an ad hoc basis
primarily at the discretion of employers. However, during the course of time, it became a major bone
of contention between employers and workmen, often resulting in industrial unrest and work
stoppages.

Many disputes on the question of bonus came up for decision by industrial tribunals and even
Supreme Court. In view of the mounting and regular unrest over the question, the Payment of Bonus
Act was enacted in 1965. The Act specifies in some detail the formula for the calculation of bonus,
and prescribes both the minimum and maximum bonus payable to specified categories of workers.

Type 6. Fringe Benefits and Miscellaneous Cash Allowances:

Apart from wages and salaries, incentive payments, dearness allowance and bonuses, employees are
often in receipt of several types of indirect compensation or fringe benefits, both in cash and kind.

These include housing facilities and house rent allowance, city compensatory allowance, leave-travel
facilities, medical facilities and allowances, educational facilities and allowances for the children of
employees, social security benefits such as sickness benefit, provident fund, gratuity and pension,
concessional availability of electricity and food-grains, transport facilities, supply of uniforms and so
on.

The nature and scale of fringe benefits vary widely from organisation to organisation. To the
employer, they are a part of labour cost. In many organisations, they constitute a substantial portion
of labour cost, surpassing even the wage bill.
Many of these fringe benefits are made available to employees voluntarily by the employers; many
have been the outcome of collective agreements and many others have been statutorily imposed.
Many employers, owning large-scale industrial establishments and also those having their
establishments in remote and isolated areas, provide housing accommodation to their employees and
have also established well-equipped hospitals and dispensaries.

Gary Dessler and Biju Varkkey have preferred to keep various forms of compensation into two main
categories—direct financial payments such as wages, salaries, incentives, commission and bonuses,
and indirect financial payments such as employer-paid insurance and leave travel concessions.
Joseph J. Martocchio has classified seven types of monetary or core compensation in the context of
practices in the U.S.A.

These are as follows – hourly pay, annual salary, cost of living adjustments, seniority pay, merit pay,
incentive pay and person-focused pay, pay-for-knowledge and skill-based pay. Practices in regard to
forms of compensation or their combinations vary from organisation to organisation depending on a
set of internal and external factors.

CONCEPT OF WAGES

Wage Management is of great significance in the study of Personnel Management. How much wages
he paid to the employees, has been a debatable question. Wage is like a pivot round which labor
problems revolve. It is pretty difficult to determine wage-rate. The entrepreneur is keen to pay minimum
possible wage to the laborer’s while the laborer’s want to get maximum wage from the entrepreneur.
To bring about synthesis between the satisfaction of the laborer’s and interests of the employers is what
is called determination of wage.
Historically, satisfaction of the workers and interest of the employees both have been open to question.

Different opinions on this issue have led to the emergence of the following concepts:
(i) Concept of Statutory Minimum Wages.
(ii) Bare or Minimum Wage Concept.
(iii) Concept of Minimum Wage.
(iv) Concept of Fair Wage.
(v) Concept of Living Wage.

A more detailed study of these concepts is as under:

(1) Statutory Minimum Wages:
According to this concept wages are so determined by the employers as to conform to the provisions
of Minimum Wages Act 1948. Under the Act, minimum wages are determined so that no labour is
paid less than the minimum fixed nor is he exploited. The employer has got to pay statutory minimum
wages, irrespective of his capacity to pay.
(2) Bare or Minimum Wage Concept:
It is that wage-rate which is determined by judicial pronouncements, Awards, Industrial Tribunals,
Labor Courts and National Tribunals. The employer is legally bound to pay this amount.
(3) Minimum Wage Concept:
The term “minimum wage” means least possible or lowest wage. It is that rate of wage, less than which
is neither paid nor accepted. Under minimum wage concept, main objective of Minimum Wage Act
1948 was to keep the labor class satisfied and to maintain industrial peace in the country. Minimum
wage implies that wage-rate which is essential to maintain standard of living, health, social dignity and
efficiency of the concerned laborers.
While determining minimum wage, it must be taken into account that its amount should be such as to
meet the bare necessities of life and also provide such facilities to the employees as are essential to
maintain their efficiency.
According to All India Employers Organization, “That rate of wage which satisfies the physical needs
of the worker and his family, is called minimum wage.”
From humanitarian as also from legal point of view laborer’s must get minimum wages as it checks
their exploitation and also eliminates inefficient employers.

FACTORS INFLUENCING COMPENSATION

The amount of compensation received by an employee should take into account several factors such
as the amount of effort put in, competitive rates prevailing in labor market, demand for and supply of
labor, the firm’s ability to pay, labor policy, etc.
Let’s look into these factors more closely:
1. The Organization’s Ability to Pay:
Wage increases should be given by those organizations which can afford them. Companies that have
good sales and, therefore, high profits tend to pay higher wages than those which running at a loss or
earning low profits because of the high cost of production or low sales. In the short run, the economic
influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses,
must pay no less than their competitors and need pay no more if they wish to attract and keep workers.
In the long run, the ability to pay is very important. During the time of prosperity, employers pay
high wages to carry on profitable operations and because of their increased ability to pay. But during
a period of depression, wages are cut because funds are not available. Marginal firms and non-profit
organizations (like hospitals and educational institutions) pay relatively low wages because of low or
no profits.
2. Supply of and Demand for Labor:
The labor market conditions or supply and demand forces operate at the national, regional and local
levels, and determine organizational wage structure and level.
If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid
for these skills. When prolonged and acute, these labor-market pressures probably force most
organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation.
The other alternative is to pay higher wages if the labor supply is scarce; and lower wages when it is
excessive.
Similarly, if there is great demand for labor expertise, wages rise; but if the demand for manpower skill
is minimal, the wages will be relatively low. Mescon says- “The supply and demand compensation
criterion are very closely related to the prevailing pay, comparable wage and ongoing wage concepts
since, in essence, all of these remuneration standards are determined by immediate market forces and
factors.”
3. Prevailing Market Rate:
This is also known as the ‘comparable wage’ or ‘going wage rate’, and is the most widely used criterion.
An organization’s compensation policy generally tends to conform to the wage rates payable by the
industry and the community. This is done for several reasons. First, competition demands that
competitors adhere to the same relative wage level. Second, various government laws and judicial
decisions make the adoption of uniform wage rates an attractive proposition.
Third, trade unions encourage this practice so that their members can have equal pay, equal work and
geographical differences may be eliminated. Fourth, functionally related firms in the same industry
require essentially the same quality of employees, with the same skills and experience. This results in
a considerable uniformity in wage and salary rates.
Finally, if the same or about the same general rates of wages are not paid to the employees as are paid
by the organization’s competitors, it will not be able to attract and maintain a sufficient quantity and
quality of manpower. Belcher and Atchison observe- “Some companies pay on the high side of the
market in order to obtain goodwill or to ensure an adequate supply of labor, while other organizations
pay lower wages because economically, they have to, or because by lowering hiring requirements they
can keep jobs adequately manned.”
4. The Cost of Living:
The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion.
This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living
index. In recognition of the influence of the cost of living, “escalator clauses” are written into labor
contracts.
When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion
of real wages. However, when living costs are stable or decline, the management does not resort to this
argument as a reason for wage reductions.
5. The Living Wage:
The living wage criterion means that wages paid should be adequate to enable an employee to maintain
himself and his family at a reasonable level of existence. However, employers do not generally favor
using the concept of a living wage as a guide to wage determination because they prefer to base the
wages of an employee on his contribution rather than on his need. Also, they feel
that the level of living prescribed in a worker’s budget is open to argument since it is based on
subjective opinion.
6. Productivity:
Productivity is another criterion, and is measured in terms of output per man-hour. It is not due to labor
efforts alone. Technological improvements, better organization and management, the development of
better methods of production by labor and management, greater ingenuity and skillby labor are all
responsible for the increase in productivity. Actually, productivity measures the contribution of all the
resource factors — men, machines, methods, materials and management.
No productivity index can be devised which will measure only the productivity of a specific factor of
production. Another problem is that productivity can be measured at several levels — job, plant,
industry or national, economic level. Thus, although theoretically it is a sound compensation criterion,
operationally many problems and complications arise because of definitional measurement and
conceptual issues.
7. Trade Union’s Bargaining Power:
Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union, the
higher the wages. A trade union’s bargaining power is often measured in terms of its membership, its
financial strength and the nature of its leadership. A strike or a threat of a strike is the most powerful
weapon used by it.
Sometimes trade unions force wages up faster than increases in productivity would allow and become
responsible for unemployment or higher prices and inflation. However, for those remaining on the
payroll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power.
8. Job Requirements:
Generally, the more difficult a job, the higher are the wages. Measures of job difficulty are frequently
used when the relative value of one job to another in an organization is to be ascertained. Jobs are
graded according to the relative skill, effort, responsibility, and job conditions required.
9. Managerial Attitudes:
These have a decisive influence on the wage structure and wage level since judgement is exercised in
many areas of wage and salary administration — including whether the firm should pay below average,
or above average rates, what job factors should be used to reflect job worth, the weight to be given for
performance or length of service, and so forth, both the structure and level of wages are bound to be
affected accordingly. These matters require the approval of the top executives.
Lester observes “Top management’s desire to maintain or enhance the company’s prestige has been a
major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract
high-caliber employees, to reduce turnover, and to provide a high living standard for employees as
possible also appear to be factors in management’s wage policy decisions.”
10. Psychological and Social Factors:
These determine in a significant measure how hard a person will work for the compensation received
or what pressures he will exert to get his compensation increased. Psychologically, persons perceive
the level of wages as a measure of success in life; people may feel secure; have an inferiority
complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in
the wages they get.
Therefore, these things should not be overlooked by the management in establishing wage rates.
Sociologically and ethically, people feel that “equal work should carry equal wages,” that “wages
should be commensurate with their efforts,” that “they are not exploited, and that no distinction is made
on the basis of caste, colour, sex or religion.”
To satisfy the conditions of equity, fairness and justice, a management should take these factors into
consideration.
11. Skill Levels Available in the Market:
With the rapid growth of industries, business trade, there is shortage of skilled resources. The
technological development, automation has been affecting the skill levels at faster rates. Thus, the wage
levels of skilled employees are constantly changing and an organization has to keep its level up to suit
the market needs.

STEPS IN COMPENSATION ADMINISTRATION

Steps in compensation Administration as given below:

1. Job analysis (The systematic process of collecting information that identifies similarities and
difference in the work.
2. Job description (Summary report that identify defines and describe the job as it is actually
performed.)
3. Job evaluation (Compensation of jobs within an Organization)
4. Job structure (an ordering of jobs based on their content or relative value.)
5. Pay structure (specify the employer's competitive pay policy)
6. Compensation.

1. Job analysis: Job analysis is done for identifying the skills and experience required to perform the
work clarifies hiring and promotion standards and identifies training needs. A Good Job analysis
collects sufficient information to adequately identify, define and describe a Job. In job analysis we
collect data related to job like title of the job, Department in which Job is located, Number of People
who holds Job, Tasks, activities, constraint on action, performance criteria, critical incidents, demand,
working conditions.

Data collected related to employee. Like professional Knowledge, manual skills, verbal skills, written
skills, quantitative skills, mechanical skills, conceptual skills, managerial skills, leadership skills,
international skills, and employee international Relationship with boss and Other superiors, peers&
subordinates and employee external Relationship with suppliers, customers, Regulatory professional
industry, community, union, employee group.
2. Job description: The information collected should be organized and summarized and documented.
That summary of the Jobs is the Job description. The Job description provides a word picture of the
job.

3. Job evaluation: Job evaluation is the process of systematically determined the relative wroth of
Jobs to create a job structure for the Organization. They are different methods to evaluate the job.
They are ranking, paired Comparison, Print method.

4. Job structure: The final result of the Job analysis, Job description Job evaluation process is a
structure.

5. Pay structure : In designing pay structure it includes steps like specify the employer's competitive
pay policy, define the purpose of the survey ,select relevant market competitors, design the survey,
interpret survey results and construct the market line, construct a pay policy line that reflects external
pay policy and balance competitiveness with internal alignment through the use of ranges flat rates.
Pay structure Undertake training. Increase experience. Facilitate career progression. Facilitate
performance. Reduce pay - related grievance. Reduce pay - related work stop page.

6. Compensation: Is the remuneration received by an employee in return for his/her contribution to

the organization. It is an organized practice that involves balancing the work-employee relation by
providing monetary and non-monetary benefits to employees.

Compensation is of 2 types:
1. Cash Compensation 2. Benefit compensation.

1. Cash Compensation:
a.) Base
b) Merit
c) Incentives
a.) Base: Base wage is the cash compensation that an employer pays for the work performed. Base
Wage tends to reflect the value of the work (or) skills and generally ignores difference attributes to
individual employees.

b) Merit: Merit increases are given as increments to the base pay in recognition of post work
behaviour.
c) Incentives: Incentives differ from merit adjustments Incentives don't increase base wage. It must
be re-earned each pay period. The potential size of the Incentive payment will generally be known
beforehand.
2. Benefit compensation:
a) Income Protection.
b) Work life Balance.
c) Allowances.
a) Income Protection: Medical insurance, retirement programs, life insurance and saving plans and
common benefits. Which help protect employees from the financial risk inherent in daily life.
b) Work life Balance: Programs that help employees better integrate their work and life
responsibilities include time away from work vocation, Jury duty) access to service to meet specific
needs (drugs consuming, financial planning, referrals for child and elders care) and flexible work
arrangements (tele commuting, on-traditional schedule) and non-paid time off, Responding to the
changing demographics of the work force.
c) Allowances: like housing (dormitories, apartment) and transportation allowances are frequently
part of the pay package.

EXECUTIVE COMPENSATION - CONCEPT AND COMPONENTS

In modern business, executives hold the most pivotal place in an organisation. They play a major part
in looking after the economic health of the company. As they are important for the success, growth and
profitability of an organisation, they have to be compensated properly. To make the executives happy
to the extent possible, companies have been giving in recent years, bigger and more frequent rises in
salaries. The cumulative effect is that executive compensation cost is today a sizeable cost and rising
cost. Companies have started looking at executive compensation more systematically and more
proactively so that they can expect better performance from the executives. For the higher management,
salaries are influenced by the size of a company, by the specific industry, and in part bythe contribution
of the incumbent to the process of decision-making. The bigger the company, the greater is the
compensation paid to the executives. Straight salaries, bonuses, stock purchase plans and profit sharing
are used to compensate executives. In addition, executives are compensated for the various expenses
incurred by them, for taxation takes away a major portion of their salary. Such payments are in the form
of:
1) medical care;
2) professional service in legal and financial matters;
3) facilitates for entertaining customers and for dining out;
4) company recreational services;
5) the cost of education and training of executives, scholarships for their children, and allowances for
professional magazines and books; and
6) free well-furnished accommodation, conveyance and servants.
All these go under the head of perquisites. A sound system of executive compensation is essential for
a number of reasons, namely:
a. to attract the right kind of personnel;
b. to retain the right kind of personnel;
c. to motivate the right kind of personnel; and
d. to get the best out of the right kind of personnel in the face of competition.
The absence of internal equity leads to dissatisfaction among executives. In organizations, there are
disparities between compensation patterns. For whatever reasons, compensation practices are kept as
guarded secrets by organisations. Surveys of compensation practices tells us among other things, that
executive compensation practices are based on factors like traditions, technology, management beliefs
and executive acceptance. To be effective, executive compensation has to be seen as a whole, evolved
for a situation and administered in letter and spirit. Essentially, an executive compensation system or
scheme for an organisation has to be tailor-made. Also, it has to be reviewed and revised from time to
time. Top management should develop an approach to compensation that accounts for internal as well
as external equity. The executive compensation will succeed when the total package:
i) establishes sufficient levels of pay;
ii) provides internal and external competitiveness;
iii) supplies opportunity, security and status;
iv) maximises after tax earnings;
v) calls forth maximum effort; and
vi) makes the executive a much better performer both as an individual and as a team member both for
today and for tomorrow.

RETENTION STRATEGIES

When one of the best employees resigns from a job, then it tends to become a nightmare for the
manager. Immediately, there should be a plan to balance the number of challenges to tackle. As the
market demands skilled and talented professionals, it is very difficult to find replacement for a talented
resource and further balance the team.

The resignation of a talented employee will also have an impact on the other team members who start
to follow his footsteps and walk out of the organization. Hence, a manager’s most important job is
to create an effective employee retention strategy.

Key Employee Retention Strategies

A good retention policy starts from the time when the employees are hired till the time, they leave the
organization. Following are some of the employment practices which will help create an impact on
employee retention −

 Recruitment and Hiring − Right and correct resource should be hired in the first place. It calls
for quite a lot of time and effort. When the bond between the employees and the organization
is cordial and the mix between the required skill set for a particular job requirement is also
right, retention is less likely to be an issue.

 Orientation and Onboarding − Treating employees the right way in the early stages of
employment is vital and enhances retention. 
 Training and Development − Training and development are the key factors in helping
employees grow with your company and stay marketable in their field. 

 Performance Evaluation − When employees are aware of what they are doing and the areas
they need to improve on, it is beneficial both for the organization and the employee.

 Pay and Benefits − While today many employees tend to rate factors such as career
development higher than pay, good pay and benefits still count to be the deciding factors for
employee retention.

 Internal Communication − Effective communication will help reduce the communication gap
in an organization and curb employee attrition. Employees need to know and be reminded on
a regular basis how the organization is doing and what they can do to help. 

 Termination and Outplacement − Employees who leave on good terms are much more likely
to recommend your company, and in doing so, help you attract and retain future employees. 

Basic Practices for Employee Retention

 Create an environment where the employees want to work and have fun.

 Giving the employees responsibility with power and authority. 

 Have trust and faith in the employee and give respect to them. 

 Keep providing them feedback on their performance.

 Provide them information and knowledge.

 Make employees realize that they are the most valuable asset of the organization.

 Recognize and appreciate their achievements.

 Keep their morale high.

These practices are categorized into three levels – Low, Medium and High.
Employee Retention Policies
The following additional policies need to be considered for employee retention −

 The responsibilities must be delegated according to the individual’s specialization and

interests.

 Constant disputes among employees encourage them to go for a change.

 The human resources department must ensure that the right candidates are hired. 

 Employee recognition is one of the most important factors which go a long way in retaining
employees.

 Performance appraisals are also important for an employee to stay motivated and avoid
looking for a change.

 The salary of the employees must be discussed at the time of the interview.

 The company’s rules and regulations should be made to benefit the employees.

SUMMARY

 The goals of compensation administration are to design the lowest cost-pay structure that will
attract, motivate, and retain competent employees. It consists of organisation’s policies,
procedures, and rules determining the compensation system.
 Compensation is usually composed of the basic wage or salary, allowances, incentive or
bonuses, and benefits.
 Compensation administration intends to develop the lowest-cost pay structure that will not only
attract, inspire and motivate capable employees but also be perceived as fair by these
employees. Establishing strategic pay plans involved four main decisions: pay level decision,
pay structure decision, differential pay decision and administration decision.
 Job evaluation serves as the foundation of most wage and salary systems. The question of fair
pay involves both internal and external equity. The fact that how employees are paid has
important consequences for individual, group and organisational performance. Top executives,
particularly receive special attention in the compensation literature because of their potential
influence on organisational success.
 Knowledge-based organizations these days follow a performance-based payment plan offering
awards to employees for cost saving suggestions, bonuses for perfect attendance or merit pay
based on supervisory appraisals. The benefits and services offered by various organizations in
India may be broadly put into five compartments. Payment for time not worked, employee
security, safety and health, welfare and recreation facilities and old age and retirement
benefits. Organisations face many challenges while deciding on remuneration of an employee.
These may be seen as different options present before them
 Retention Strategies -Most business owners and managers think retention is based on
compensation issues-wage and salary levels, incentives, and golden handcuffs--when in reality
the drivers go much deeper into the human psyche to the actions and attitudes that make
employees feel successful, secure and appreciated. As a result, a sound retention strategy
should focus on and tactically address four key elements-performance, communication, loyalty
and competitive advantage.

KEY WORDS/ABBREVIATIONS

 Achievement award – Provides an incentive, in the form of a onetime payment, to eligible

employees for attaining measurable goals above and beyond normal duties that support the
university’s mission and objectives.
 Adjustment - Salary changes outside of the normal salary programs (promotions,
reclassification's, merits, etc.) to remedy salary issues such as external pressure in high demand
areas, internal salary compression, and/or retention considerations.
 Base Pay – fixed compensation paid to an individual;' it is typically expressed as an hourly rate
or an annual amount. The calculation of base pay is: (hourly rate*2080).
 Benefit: An indirect reward given to an employee or group of employees as a part of
organizational membership.
 Compensation: It refers to the financial and non-financial rewards to the employees for their
services rendered to the company.
 Earnings: Total amount of remuneration received by an employee during a given period.
 Internal Equity - criterion used to determine fairness in pay among employees of an
organization.
 Skill – Based Pay - an alternative compensation system in which pay is based, not upon the
specific job the employee performs, but upon the number of skills or tasks the employee is
capable of per- forming. Such pay systems are linked to flexible work as- segments or both,
rotating jobs, typical of self-managed work teams.
 Salary (Salary Rate) - for workers hired on a weekly, monthly, or annual basis (e.g., clerical,
technical, managerial employees), the rate of pay normally expressed in terms of Rupees per
week, month, or year, as opposed to payment for an hour of work.
 Salary Structure-structure of job grades and pay ranges established within an organization.
The salary structure may be expressed in terms of job grades, job evaluation points, or policy

LEARNING ACTIVITY

1. Is there any system of production bonus and/or any other kind of incentive payment in your
organization? If so, give details

……………………………………………………………………………………………………….…
…………………………………………………………………………………………….....................

2. If you were establishing your own business, which benefits would you be statutorily required to
pay and which you would offer voluntarily?

……………………………………………………………………………………………………….…
…………………………………………………………………………………………….....................

UNIT END QUESTIONS (MCQ AND DESCRIPTIVE)

A. Descriptive Types Question

1. List down the basic principles of compensation administration?
2. Identify and discuss the characteristic features of executive compensation?
3. What type of compensation system normally motivate the executives?
4. Analyse the future trend of employee compensation in India.
5. Compare and contrast individual, group, and organisation-wide performance bonus systems.
How are they alike? and/or Different?
6. If we pay predominantly for jobs rather than people, how can we reward the truly exceptional
performing employee?
7. How can employers make employees realise that benefits and services must be earned?
8. Which retention strategies will you imply in your organization as HR Manager?
B. Multiple Choice Questions
1. Payment of cash rewards for the work extracted from the employee is normally called

a. direct compensation
b. indirect compensation
c. non-monetary compensation
d. None of the above

2. Which of the following is the fixed component in compensation packages?

a. Profit-sharing
b. Base salary
c. Gain-sharing
d. Equity stock options

3. Insurance schemes, retirement benefits and leave travel concession are examples of
a. indirect monetary compensation
b. direct monetary compensation
c. non-monetary compensation
d. None of the above

4. Ensuring a fair balance between an employee’s contributions to the job and the rewards received in
return from that job is the essence of

a. equity theory
b. expectancy theory
c. agency theory
d. contingency theory

5. Which of the following is not an objective of executive compensation plans?

a. Separating ownership interest and controlling interest

b. Enhancing employee motivation, involvement and commitment
c. Promoting managerial efficiency
d. Attracting and retaining the best executives

Answers:

1-a, 2-b, 3-a, 4-a, 5-a

REFERENCES

 Duari, Pravin. (2010). Human Resource Management. New York: Pearson Education.
 Dessler, G. (2013). Human Resource Management. Delhi: Prentice-Hall.
 Flippo, Edwin B. (1966). Personnel/Human Resource
Management. New Delhi: TataMcGraw Hills.
 Haldar, U.K. And Sarkar. (2012). Human Resource Management.
New Delhi: Oxford &IBH.
 Saiyadain, M.S. Human Resource Management. New Delhi: Tata McGraw
Hill.

 Sanghi, S. (2004). The Handbook of Competency Mapping. New Delhi:

Sage Publications
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