Compensation A Concept

By DR DP Sahoo

Compensation (meaning) - Compensation is a systematic approach to providing monetary value to employees in exchange for work performed.

"If you pick the right people and give them the opportunity to spread their wings and put compensation and rewards as a carrier behind it - you almost don't have to manage them." -Jack Welch

Compensation may be used to: Recruit and retain qualified employees. Increase or maintain morale/satisfaction. Reward and encourage peak performance. Achieve internal and external equity. Reduce turnover and encourage company loyalty. Modify (through negotiations) practices of unions.

Objectives of Compensation systems:

1. 2. 3. 4. 5. 6. 7.

Adequacy: Equitable Balanced Cost efficient Secure & consistency Incentive provider Acceptability ( to Employees & Management)

Compensation Strategy

Compensation System design concept

Considerations And Activities

Decisions

Hire employees

External Equity

Salary & Benefits Bench marking

Pay Level Pay Structure Benefit Level Benefit Structure

Compensation Goals

Retain employees

internal Equity

Internal Benefits Bench marking*

Motivate employees

Employee Equity Relative worth of the employee**

Job Content Job Structure

Mix of Pay Adjustments

Org Strategy

Economy

Legislation

Unions

Constraints

Internal Labour Market

External Labour Market

*In the form of : Job Analysis, Job Evaluation, Job Description. ** Merit Pay, Bonus Pay, Incentive Pay, Fringe benefits, Performance linked pay etc.

What is compensation?

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 an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.

Money being the most critical incentive, at works, compensation is important both for employees and employers.

Need for compensation Management

A good compensation package motivates the employees to increase the organizational productivity. Compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and selfactualization needs to fulfill. Thus, compensation serves the purpose. The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards.

Types of Compensation
Compensation provided to employees can be direct in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

Direct compensation

Basic Salary Basic Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc Conveyance Organizations provide for cab facilities to their employees. Leave Travel Allowance The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization.

HRA: Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work.

Medical Reimbursement The employees are provided with medi-claims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements.
Bonus Bonus is paid to the employees during festive seasons to motivate them and provide them the social security.

Special Allowance Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.

Indirect Compensations

A sound compensation policy

1. Organizations encourages clear-cut plan to determine different pay level on the basis of : a. Skill levels, b. efforts & responsibilities, c. working condition, d. Length of service, e. Qualifications. f. Past performance, g. Length of service in the organization etc. 2. Equate salaries in the industry, market trend etc. 3. Pay for job performed not for person involved. 4. Distinguish people from Job. 5. Equitable measures to avoid individual difference. 6. Introduction of wages grievance mechanism. 7. Transparency and communication with employees and the associations on the factors determining the wages structure.

Advantages of Fair Compensation System:

Therefore a fair compensation system is a must for every business organization. The fair compensation system will help in the following: 1.If an ideal compensation system is designed, it will have positive impact on the efficiency and results produced by workmen. 2.Such system will encourage the normal worker to perform better and achieve the standards fixed. 3.this system will encourage the process of job evaluation. It will also help in setting up an ideal job evaluation, which will have transparency, and the standards fixing would be more realistic and achievable. 4.Such a system would be well defined and uniform. It will be apply to all the levels of the organization as a general system. 5.The system would be simple and flexible so that every worker/recipient would be able to compute his own compensation receivable. 6.Such system would be easy to implement, so that it would not penalize the workers for the reasons beyond their control and would not result in exploitation of workers. 7.It will raise the morale, efficiency and cooperation among the workers. It, being just and fair would provide satisfaction to the workers. 8.Such system would help management in complying with the various labor acts. 9.Such system would also bring about amicable settlement of disputes between the workmen union and management. 10.The system would embody itself the principle of equal work equal wages. Encouragement for those who perform better and opportunities for those who wish to excel.

Difference between Compensation & Rewards

Forms of Control Theoretical Terms

Coercive / Threat Remuneration Motivate , Encourage, Recognize

Why Rewards?

Punishment Compensation Reards

The impact of the law of diminishing returns from the additional earnings (on the marginal income). Non- financial rewards strengthen the Psychological contacts between Employer & Employee.

Explain the concept the help of Maslows model of need hierarchy & Vrooms expectancy theory

Rewards in terms of Maslows theory

Work Motivation Model By Smith & Cranny

Rewards Work motivation is the result of interaction of three main variables i.e. Efforts, Satisfactions & Rewards. Performance

Effort or intention

Satisfaction

Performance will lead to rewards is a pre conditions.

Impact of rewards systems:

-Rewards motivates learning skills -Rewards motivates for knowledge -Rewards motivates for new initiatives -Rewards motivates thinking out of the box -Rewards motivates for higher performance. -Rewards motivates for cost compression.

The following are some of the tasks of a Compensation and Benefits manager:
Identify and put into service an attractive pay package which is capable of retaining the existing talent within the entity. Bench mark salaries with competitors to guarantee that the compensation and benefit package offered is equivalent to those existent in the market. Researching and scrutinising the general factors like the government policies, change in the tax structure, market conditions, etc to ensure that the compensation package is capable of providing an expected standard of living to the employees Pains must be taken to make modifications to the existing pay and compensation structure every annum after taking into account the employee performance, company policies, Government regulations, Labour laws, statutory laws like the Income Tax amendments, competitive rates, etc. He should modify the pay structure on the basis of the employee performance appraisals to bring a heterogeneous structure as a move to retain key movers and shakers.

The following are some of the tasks of a Compensation and Benefits manager:
A compensation and benefits manager is responsible for the identification, implementation and modifications to the employee benefit schemes like health and life insurance of the employees and their family members, pension schemes, medical reimbursement programs, etc taking into account the actual cost that might be incurred by the employee. Other compensation measures like bonuses, profit sharing, etc must move in line with the changes in the pay structure and other external and internal factors. The manager must conduct surveys to discover the expectations of the employees regarding the various compensation schemes, compare them with the current policies and propose modifications on the basis of the surveys and their impact on the cost to the company. He is to provide cost analysis to the management to aid them in bargaining to the proposals put forth by the labour unions. The compensation and the benefits manager is to provide the payroll related data after taking into consideration the proposed modifications for budgeting. With the number of mergers and acquisitions being on the rise, the integration of the schemes of the two companies into a viable solution supported by the employees of both the companies requires the knowledge and skill of the expert.