What is compensation?

Compensation is the total cash and non-cash payments that you give to an employee in exchange for the
work they do for your business. It is typically one of the biggest expenses for businesses with employees.
Compensation is more than an employee’s regular paid wages. It also includes many other types of
wages and benefits.

Types of compensation include:

 Base pay (hourly or salary wages)

 Sales commission
 Overtime wages
 Tip income
 Bonus pay
 Recognition or merit pay
 Benefits (insurances, standard vacation policy, retirement)
 Stock options
 Other non-cash benefits

ESTABLISHING PAY PLANS

The process of establishing pay rates while ensuring external, internal, and procedural equity
consists of five steps:

1. Conduct a salary survey of what other employers are paying for comparable jobs.
2. Determine the worth of each job in your organization through job evaluation.
3. Group similar jobs into pay grades.
4. Fine-tune pay rates.

Step 1. The Salary Survey

It’s difficult to set pay rates if you don’t know what others are paying, so salary surveys–surveys of
what others are paying–play a big role in pricing jobs. Salary surveys can be formal or informal.
Informal phone or Internet surveys are good for checking specific issues. Some large employers can
afford to send out their own formal surveys to collect compensation information from other
employers.

Step 2. Job Evaluation

Job evaluation aims to determin a job’s relative worth. The basic principle of job evaluation is this:
Jobs that require greater qualifications, more responsibilities, and more complex job duties should
receive more pay than jobs with lesser requirements.
Compensable Factors A fundamental, compensable element of a job, such as skills, effort,
responsibility, and working conditions. For example, Hay consulting firm emphasizes three factors:
know-how, problem solving, and accountability. Walmart bases its wage structure on knowledge,
problem-sovling skills, and accountability requirements.

Prepared by: Sujata Chamlagain MBA 1 st Sem

Preparing for the Job Evaluation The main steps include identifying the need for the program,
getting cooperation, and then choosing an evaluation committee.
Job Evaluation Methods: Ranking There are several steps in the job ranking method.

1. Obtain job information.

2. Select and group jobs.
3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.

Job Evaluation Methods: Job Classification Job classification (or job grading) is a simple, widely
used method in which raters categorize jobs into groups; all the jobs in each group are of roughly the
same value for pay purposes.
The most popular procedure is to choose compensable factors and then develop class or grade
descriptions for each class or grade in terms of the amount or level of the compensable factor(s) in
those jobs.
Job Evaluation Methods: Point Method The point method is a quantitative technique. It involves
identifying (1) several compensable factors, each having several degrees, as well as (2) the degree
to which each of these factors is present in the job.
Job Evaluation Methods: Factor Comparison is a refinement of the ranking method.
Computerized Job Evaluations have two main componets: a structured questionnaire, and use
statistical models.

Step 3. Group Similar Jobs into Pay Grades

A pay grade is comprised of jobs of approximately equal difficulty or importance as established by
job evaluation.

Step 4. Price Each Pay Grade–Wage Curves

The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points
or rankings assigned to each job or grade by the job evaluation.
Here is how to price jobs with a wage curve. First, find the average pay for each pay grade, since
each of the pay grades consists of several jobs. Next, plot the average pay rates for each pay grade.
Then fit a line, called a wage curve, through the points just plotted. Finally, price the jobs.

Step 5. Fine-Tune Pay Rates

Fine-tuning involves (1) developing pay ranges and (2) correcting out-of-line rates.
Developing Pay Ranges Pay ranges often appear as vertical boxes within each grade, showing
minimum, maximum, and midpoint pay rates for that grade.
Correcting Out-of-Line Rates

FRINGE BENEFITS
Fringe benefits are forms of compensation you provide to employees outside of a stated
wage or salary. Common examples of fringe benefits include medical and dental insurance,
use of a company car, housing allowance, educational assistance, vacation pay, sick pay,

Prepared by: Sujata Chamlagain MBA 1 st Sem

 meals and employee discounts. Total compensation includes regular income and all of these
paid benefits.

The majority of employers in the private and public sectors offer their employees a variety of
benefits in excess of stated salaries. These additional on-the-job perks, typically referred to as
fringe benefits, are viewed as compensation by an employer but are generally not included in
an employee’s taxable income. A wide range of fringe benefits exists and what is offered varies
from one employer to another, but the most common benefits include life, disability and health
insurance bundles; tuition reimbursement or education assistance; fitness center access or
discounts; employee meals and cafeteria plans; dependent care assistance; and retirement plan
contributions.

Some Fringe Benefits

 Insurance Coverage
The most common fringe benefits offered to employees include combinations of
insurance coverage. Typically, employers offer up to $50,000 of group term life
insurance, short- and long-term disability coverage and health insurance options.
Employers commonly share the cost of premiums with employees in an effort to offset
total cost to the employee.

 Education Assistance
Another common fringe benefit is education assistance or tuition reimbursement for
college courses or the completion of an advanced degree program. Employers offering
education assistance may allow employees to work flexible schedules so class and work
obligations can be integrated or they may provide reimbursement for all or part of
tuition expenses.

 Meals and Cafeteria Plans

Meals or discounted cafeteria plans may also be offered to employees as fringe benefits.
Employers recognize that the cost of lunch or dinners when employees work late can
add up quickly and, as such, meals are provided by some employers at no cost to the
employee.

 Dependent Assistance
Child care assistance is another benefit offered through some employers, as working
full-time with children can present scheduling conflicts and prohibitive day care costs.
Some larger employers offer employees dependent care on-site, either at a discount or
for no cost, while smaller companies may provide a monthly bonus to employees for the
specific purpose of paying for dependent care.

Prepared by: Sujata Chamlagain MBA 1 st Sem

  Retirement Plan Contributions
One of the most important fringe benefits an employer can offer is contributions to an
employee’s retirement plan. Some companies offer matches on employee 401(k)
paycheck deferrals, while others make qualified contributions to retirement plans
without requiring employees to make contributions themselves. This can be a powerful
tool in saving for the long-term and provide a much higher total compensation to
employees above and beyond their salaries.
Performance Based Pay
Knowledge-based organisations these days follow a performances-based
payment plan offering awards to employees for cost saving suggestions, bonuses for
perfect attendance or merit pay based on supervisory appraisals. The objective of
performance pay is to develop a productive efficient and effective organisation which
enhances employees’ motivation and effectiveness. Performance pay is based on
employees performance on the job. It is believed that this approach attracts and retains
better talents. A growing number of companies in recent times have established
compensation programmed for employees that offer additional compensation based on
individual, group and organisational performance. The logic behind this move is
understandable.
Organisations want every individual to think of performance in the same way as
the organisation. You have to compete, get ahead, deliver results and fight for the
winning slot almost on a daily basis. In such a scenario, the employer-employee
relationship assumes a mercenary dimension, bulldozing poor performers at every
stage. The organisation becomes cold and transactional rather than warm and
relationship oriented. It affects workforce camaraderie and undoubtedly kills the morale
of a large majority of employees who lag behind in the race. The single-minded focus on
the performance, of course, helps the organisation in weeding out the dead wood and
remain highly competitive.
Guidelines for Effective Performance-based Pay System
To be fair to employees, organisations should keep the following guidelines in mind
while instituting merit pay systems:
1. Establish high standards of performance, so that only the truly outstanding
employees emerge as winners.
2. Develop accurate performances appraisal systems. The focus must be on job-specific,
results-oriented criteria as well as employee behaviours.
3. Train supervisions in the mechanics of carrying out appraisals and offering feedback
to employees in a proper way.
4. Tie rewards closely to performances.
5. Use a wide range of increases. Also, make pay increases meaningful.

Prepared by: Sujata Chamlagain MBA 1 st Sem

 Employee Benefits and Services

Services

Employee services can include anything an employer deems necessary to provide as a perk for employees. No
real limit exists as to what can be included as an employee service. Some companies provide cafeterias and
event catering services for employees. Others have coffee shops. Employee services are more of a convenience
than a true benefit. Busy corporate offices, for example, might provide dry cleaning pickup services for
employees. Employers in remote locations might offer shuttle services to and from work. The types of services
depends upon each employer. Small business owners can use employee services such as on-site childcare to
make their positions more attractive to potential employees.

Benefits

Employee benefits differ from employee services in that benefits tend to be necessities for many people. Basic
insurance needs are covered by many employee benefit plans. Insurance options provided by employers can
include health insurance, but they can also include life insurance, accidental death and disability insurance,
dental insurance and unemployment insurance also. Other types of benefits usually include a retirement plan in
the form of a 401(k) or some other qualified tax-deferred plan. Although employee services might be
considered a benefit, they are usually optional and not necessarily what job seekers first look for when
conducting a job hunt.

Types of Employees Benefits and services

The fringe benefits offered by various organisations in India may be broadly classified into
different categories. These are discussed below:
1. Payment in Time: This category includes (a) hours of work (b) paid holidays, (c) shift
premium, (d) holiday pay and (e) paid vacation.
2. Employee security:
3. Safety and health:
4. Workmen’s compensation:
5. Health benefits:
6. Voluntary arrangements:

Prepared by: Sujata Chamlagain MBA 1 st Sem

7. Welfare and recreational facilities: Welfare and recreational benefits include: (a) canteens,
(b) consumer societies, (c) credit societies, (d) housing, (e) legal aid, (f) employee counselling,
(g) welfare organisations, (h) holidays homes, (i) educational facilities, (j) transportation, (k)
parties and picnics and (l) miscellaneous.
8. Old age and retirement benefits: Industrial life generally breaks the joint family system. The
saving capacity of the employees is very low due to lower wages, high living cost and increasing
aspirations of the employees and his family members. As such, employers provide some
benefits to the employees, after retirement and during old age, with a view to creating a feeling
of security about the old age. These benefits are called old age and retirement benefits. These
benefits include: (a) provident fund, (b) pension, (c) deposit linked insurance, (d) gratuity and
(e) medical benefit.

Challenges of Remuneration
People who administer wage and salary face challenges which often necessitate adjustments to a
remuneration plan. The more important of the challenges are skill-based pay, salary reviews, pay
secrecy, comparable worth, employee participation, elitilism or egalitarianism, below market or above
market rates, and marketing versus non-marketing rewards.

Skill-Based Pay : In the skill based system, workers are paid on the basis of number of jobs they are
capable of doing, or on depth of their knowledge. The purpose of this system is to motivate employees to
acquire additional skills so that they become more useful to the organization.

Pay Reviews : Pay, once determined, should not remain constant. It must be reviewed and challenged
often, but how often becomes a relevant question. Pay reviews may be made on predetermined dates,
anniversary dates or there could be flexible reviews. In the fixed-date reviews, wages and salaries of all
employees are reviewed and raised on a specified date each year. In the anniversary-date review,
salaries may be reviewed at twelve-month intervals from the date of the employee’s anniversary date of
hire. Using variable timing ensures flexibility. In addition, high-performing employees, who are low on their
salary ranges, can be rewarded more frequently.

Pay Secrecy : The process by which a remuneration plan is designed and administered is critical for any
organization. One challenge facing HRM concerns the availability of information about remuneration to
employees. The tendency among most firms is to maintain pay secrecy as this would help avoid pay
comparisons likely to be made by employees.Just how much and what types of information about pay
should be provided to employees is a question that troubles HR managers. This is  a difficult question to
answer. Much has been written about the effects of pay secrecy on employee behaviors and attitudes.

endency to assign higher number of points for jobs traditionally held by women.

Employee Participation : When employees are involved in designing a remuneration plan, they exhibit
little resistance in accepting it. Such a plan is much more likely to be a successful motivator than the one
imposed by the management.

Prepared by: Sujata Chamlagain MBA 1 st Sem

It is appropriate to involve employees in many phases of a reward system. For example, a wide variety of
employees should serve in job evaluation committees. If a point- ranking method is a adopted, it is reason
able to involve employees in identifying the compensable factors to be used and the weight to be
assigned to each factor. Employees are also likely to have a good insight in identifying competitor firms
that should in included in a wage survey.

Below Market Vs. Above Market Remuneration : Remuneration involving decisions relating to below
market or above market pay structure has two implications. First a firm’s ability to attract talent from
others depends on employee’s pay relative to attractive employment opportunities. Second, the choice
has an important cost component.  Decisions to above going rate obviously adds to the cost. However in
general above market pay policies are prevalent among larger companies in less competitive industries,
such as utilities and among companies that have been performance well and have the ability to pay more.
In additional, companies desirous of growing fast in a tight labour market need to pay above ,market
rates. Unionized firms also need to pay higher rates.

Monetary Vs. Non-monetary Rewards : The issue relating to monetary and non-monetary rewards has
primarily tax implications. Many non-monetary rewards such as medical benefits and housing are fully or
partially exempted from taxes. Employees and even employees prefer non-monetary benefits than
monetary rewards.

Developing HR Need

Human Resource Development (HRD) is the framework for helping employees develop their
personal and organizational skills, knowledge, and abilities.

HRD is one of the most significant opportunities that employees seek when they consider you as
an employer. The ability, and encouragement, to continue to develop their skills help you to
retain and motivate employees.

Human Resource Development includes such opportunities as employee training, employee

career development, performance management and
development, coaching, mentoring, succession planning, key employee identification, tuition
assistance, and organization development.

The focus of all aspects of Human Resource Development is on developing the most superior
workforce so that the organization and individual employees can accomplish their work goals in
service to customers.

Organizations have many opportunities for human resources or employee development, both

within and outside of the workplace.

Scope of HRD:
Human resource management (HRM) deals with procurement, development,
compensation, maintenance and utilization of human resources. HRD deals with
efficient utilization of human resources and it is a part of HRM.

Prepared by: Sujata Chamlagain MBA 1 st Sem

Human resource being a systematic process for bringing the desired
changes in the behaviour of employees involves the following areas:
1. Recruitment and selection of employees for meeting the present and future
requirements of an organization.

2. Performance appraisal of the employees in order to understand their capabilities and

improving them through additional training.

3. Offering the employees’ performance counselling and performance interviews from

the superiors.

When the Human Resources Development(HRD) practices

are effectively one in organisation today?
Human Resources Development practices of using variables such as (a) Recruitment and Selection, (b) Training and
Development, (c) Appraisal and Reward, (d) Performance management, (e) Managing people, (f) Promotion and
Transfer, (g) Compensation management and welfare measure, (h) Employee health and safety, & (i) Industrial
relations

Prepared by: Sujata Chamlagain MBA 1 st Sem