COMPENSATION AND BENEFITS {MU0015}

1. Explain compensation as a retention strategy. Describe the significant compensation issues.

Compensation system plays as integral role in retention of employees as a poor compensation is
indeed one of the strong factors of employees leaving the organisation. A compensation system in an
organisation can be linked to employees behaviour and attitude. An ineffective compensation strategy
can result in poor job satisfaction and organisational identification which may further affect employee
behaviours towards each other and the organisation.
Significant compensation issues:
When managers aim to reward their employees in a fair manner they must also take into consideration
certain critical issues like labour cost control, legal issues relating to male and female wage payment
and concerns relating internal pay equity.
Major significant issues:

Equal pay for comparable worth

This issue has risen from the fact that the job which are performed by women
employee are less paid in comparison to the jobs which are performed by men. Such a
practice in criticism is termed as institutionalised sex discrimination.
Example: A female receptionist is paid less than a male receptionist in spite of the
fact that both may be contributing equally to the organisation success.
Low salary budgets
The tight compensation cost control resulted from global job competition, reduction in use of
man power due to introduction of new technology and increasing utilisation of part time and
temporary workers receiving low wages and benefits have all resulted in low salary budgets
of the company.
Example: Though the employees did not have a tough time but still the reports of
worldatwork shows that the increase in the size of salaries has been comparatively more
before 1990.
Wage rate compression
The compression in wage rate takes place when less experienced junior employees earn
comparatively more than the employees who are experienced. This can be attributed to the
sole reason that such inexperienced employees are paid more due to higher starting salaries.
Example: Due to lack of availability are supply of well qualified applicants in the field of
engineering, computers and other technical and professional fields, they are offered high
salary packages in comparison to senior and experienced employees.
Identification of compression of wage rate and its causes are quite simple in
comparison to implementation of policies aimed to reducing its effect.
Therefore, compression problem should be well addressed as it can cause low morale
among employees. This may result in reduction in their performance, a higher turnover and
absenteeism rate, and emergence of an immoral behaviour of employees such as theft etc.

2. Explain the steps involved in designing a salary structure. List the components of pay
structure.

Steps involved in designing a salary structure:

Step 1: Job analysis
It is a method of studying and identifying various jobs in the organisation which results in
description of job. The content are as follows
a summary of the job tasks
a description of work context
job title
abilities, knowledge, skills needed to perform the job
a list of the essential responsibilities and tasks
Step 2: Job evaluation
It is a procedure of analysing the relative worth of the jobs in an organisation which may
result in hierarchical ranking or development of an internal structure of jobs. It helps to make
sure that pay is perceived to be fair and internally aligned by the employees. You can note that
there are three methods of job-based evolution which are as follows:
Ranking method
Classification method
Point method
Step 3: Pay policy identification
The identification of the pay policy examines whether the organisation wants to meet, lead or
lag the market in the compensation structure or not. This pay strategy or policy will help the
organisations in attracting new employees and retaining its existing employees. The variations
in pay structure can be seen across job levels and job families (i.e., groups of similar jobs).
These variations are caused by the higher authorities as they think that the several strategies
or policies can be useful at various levels of the organisations.
Step 4: Pay survey analysis
In this, the compensation data is collected and gathered from various employers of the
relevant labour market in a survey. Then, data analysis is conducted. Collection of external
pay structure such as bonuses, benefits, stock options and base pay is important to make the
compensation structure of the organisation externally competitive within its industry.
Improvement in employee attraction and retention can be maintained by aligning the external
structures of pay.
Step 5: Pay structure creation
The last step in designing a sound pay structure is its creation in which the internal pay
structure which you have seen in step 2 is combined with external market pay rates which you
have seen in step 4 in order to build a market pay line. The market pay line can be adjusted up
or down depending upon whether the organisation wants to meet, lead or lag the market.
The components of pay structure.
The three basic components of pay structure are as follows:
1. Basic wage: It is a pay which could be given on weekly, daily or monthly basis at a given
level of output for a normal rate. It is a price which is paid to get a particular job done.
2. Dearness allowance(DA): This allowance is given to the wage earners so as to give
assistance to them in the inflationary situations by giving an additional allowance of offset the
cost of living.
3. Profit sharing bonus: In payment of bonus, an employee willingly looks forward to an
annual issue. In India every year, the payment of annual bonus is a constant source of friction.
The other components of pay packet are as follows:
Medical benefits

Provident fund
Leave travel concession
ESIS
Educational allowances for children etc.
Compensatory city allowance
Group-linked insurance scheme
Leave with pay
House rent allowance

3. Define the term wage. Write a brief note on wage policy.

Wages in its broadest sense implies any kind of economic compensation received by the
employee from the employer under the contract of employment whereby the employee
renders some services to the employer.
The term wage is used to define different concepts like wage rate, gross average hourly
earnings, straight time average hourly earnings, weekly earnings, weekly take home pay,
annual earnings etc.
Wage policy
Wage policy can be defined as the principles which act as guidelines for determination of
wage structure. It relates to all systematic efforts of the government in relation to national
wage and structure of wages.
wage policy in india

The first plan (1951-1956)

Suggested that pre-war levels of real wages should be restored as an initial march towards living
wage by use of enhanced productivity. It further suggested various measures for making wage
adjustments like reduction of disparities in income, reduction of gap between the current and leaving
wages, maintenance and standardisation of wage differentials to provide incentives.

The second plan (1956-1961)

Stressed improvement in wages through increased productivity stemming from efficiency on the part
of the workers, improved layout of plants and improvement in management practices.

The third plan (1961-1966) reinforced the wage policy of the preceding two plans with
respect to minimum wage fixation, reduction of disparities and wage differentials and stressed
the role of productivity in raising the leaving standard of the workers.
The fourth plan (1969-1974) did not provide a fresh direction or any shift of the
governments wage policy.
The fifth plan (1974-1979) recommended that the reward structure of the industrial
employees interms of wage and non wage benefits must be related to performance records in
industrial enterprises.

The sixth plan (1980-1985) pointed out that there were clear variations with respect to wages
between the organised, un organised and urban and rural sectors. The differnences and
inequalities have resulted in social tensions and industrial unrest. Therefore, the plan stressed
the need for bringing about a larger support of wage structure and connection of pay atleast in
some measure to labour productivity.
The seventh plan (1985-1990) claimed that an important aspect of labour policy is related to
the formulation of an appropriate wage policy. The basic aim of wage policy was rise in the
levels of real income in union with increase in productivity, promotion and productive
employment improvements in skills, sectoral shifts in the desired directions and reduction in
disparities.
The eighth plan (1992-1997) laid focus on formulation of wage policy involving child
labour, rural and bonded labour, women labour and inter state migrant labour, etc.

4. Explain the concept of tax planning with an example. Explain its

role in Compensation Benefits

Tax planning is an analysis done for the reduction of tax liabilities that enables employers and
employees to evaluate their financial profile. The objective of tax planning is tax
minimization on their personal income or business profits.
Tax planning involves three basic phases
1. computation of total taxable income under different heads like earnings from salary, capital
gains and house property, etc.
2. Computation of tax to be paid on gross taxable income in a financial year.
3. Making a choice among two options given below to calculate the tax liability
a) Pay your tax
b) Minimise the tax liability using tax planning
Among the above mentioned two choices, individual and firms choose to go with second option they
do a comparative study of the advantages of different tax saving schemes. They take into
consideration the factors like age, personal preferences, financial and social liabilities, tax slabs, etc.
To reduce the tax liability to zero or minimal.
Therefore, tax panning entails the structuring of salary, timing of income and purchase plans, selection
of best investment plan, the process and outlays in tax filling, etc.
Role of tax planning in compensation benefits
Tax planning is all about putting the hard earned money to good use instead of giving it all to the
government. It doesnt mean not paying taxes, it just means being smart about placing the money to
acquire maximum benefits to the employee and his/her future livelihood.

An employer, has to pay even more attention to tax planning with the below points being included in
the planning.

Entity Structure Planning

The optimal entity structure for the business should be created and the tax benefits and legal asset
protection benefits should be personally maximised.

Compensation And Benefit Planning

Strategies should be developed that meet the personal and business short and long goals and
objectives. Its really about minimising taxes and out of pocket expenses paid with after tax rupees.
The goal is to minimise the income and the amount available to the business by minimising the taxes
across the board.

Maximise Advanced Retirement Planning And Income Deferral Opportunities

Employers must annually capitalised on technics to maximise money and continued income streams
available for life after the business.

Utilise Succession, Exit Strategy, And Estate Planning Opportunities

When the employer exits a business, it will be a taxable event. A plan should be developed to
minimise taxes on the transfer to ensure maximum amount of take away money.

Avoid Or Eliminate Questionable Or Grey Area Tax Planning Strategies To Reduce

Audit Risk

All the tax planning strategies should be supported by the black and white language of the IRS tax
code and regulations. For the informed employer many opportunities exist.