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EXCEL BOOKS

Chapter

16

COMPENSATION ADMINISTRATION

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ANNOTATED OUTLINE
INTRODUCTION
Compensation is what employees receive in exchange for their contribution to the organization. Generally speaking, employees offer their services for three types of rewards Base pay Variable pay Benefits

The most important objective of any pay system is fairness or equity, generally expressed in three forms Internal equity: where more difficult jobs are paid more External equity: where jobs are fairly compensated in comparison to similar jobs in labour market Individual equity: where equal pay is ensured for equal work

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Objectives of compensation planning

Attract talent Retain talent Ensure equity Reward appropriately(loyalty, commitment, experience, risk raking and other desired behaviours) Control costs Comply with legal rules Ease of operation

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Equity And Pay Rates

Equity in pay rates could be achieved through five steps

Ensuring equity in pay rates

Find the worth of each job through job evaluation Conduct a salary survey through the following methods Key job matching Key class matching

Occupational method
Job evaluation method Broad classification method

Group similar jobs into pay grades(pay grades are groups of jobs within a particular class that are paid the same rate

Price each pay grade by using wage curve(curve in a scatter diagram representing the relationship between relative worth of jobs and wage rates)
Fix a pay rage for each grade (like pay for officer category I, II, III etc)

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Components of Pay Structure

The two essential components of pay structure are; basic wages and dearness allowance .the basic wage rate is fixed taking the skill needs of the job, experience needed, difficulty of work, training required, responsibilities involved and the hazardous nature of the job. Dearness allowance it paid to employees in order to compensate them for the occasional or regular rise in the price of essential commodities.

Components of pay structure in India

Under the Workmen's Compensation Act Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus and good conduct bonus Under the Payment of Wages Act Retrenchment compensation, payment in lieu of notice , gratuity payable on discharge

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Components of Pay Structure

The following, however, do not come under the term wages Bonus Payments made under a profit sharing scheme Value of house accommodation Medical allowances

Travelling allowances
Any other sum paid to defray special expenses incurred by the worker Contribution to pension, provident fund

Any amenity or service excluded from the computation of wages

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Wage And Salary Administration

It is the process of managing a companys compensation (base compensation as well as supplementary) programme Base compensation, here, refers to monetary payments to employees in the form of wages and salaries. It is a fixed, non-incentive kind of payment calculated on the basis of time spent by an employee on the job. Supplementary compensation signifies incentive payments based on the actual performance of an employee.

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Wage And Salary Administration

Objectives To establish a fair and equitable remuneration To attract competent personnel To retain present employees To control labour cost To improve motivation and morale of employees To project a good image of the company Principles Wage and salary plans be sufficiently flexible Job evaluation being done scientifically Wage and salary plans be always consistent with overall plans Wage and salary plans being responsive to changing conditions
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Factors affecting compensation levels

Factors influencing compensation levels
Job needs Ability to pay Cost of living Prevailing wage rates

Unions
Productivity State regulation Demand and supply of labour

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Wage Policy In India

A wage policy offers certain guidelines for determining a wage structure. The term wage structure refers to various pay scales showing rages of pay within each grade. Three important elements of wage policy in India need to be elaborated here Minimum wage: Wage sufficient to sustain and preserve the efficiency of the worker and offer basic amenities of life

Fair wage: It is above the minimum wage but below the living wage. It is fixed, taking into account factors such as the productivity of labour, prevailing wage rates, level of national income and its distribution, the employers capacity to pay etc.
Living wage: This is the highest amount of wages proposed by the government, offering basic amenities of life and satisfying the social needs of worker.

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State regulation of wages

Institutions involved in fixation of wages
Employer Collective Bargaining Legislation Wage Boards Pay Commissions Minimum Wages Act Payment of Wages Act Adjudication Machinery

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Wage differentials
Differences in wage rates are inevitable in any industry and the reasons are fairly obvious

Reasons for wage differentials

Wage differentials Interpersonal differentials Inter-occupational differentials Inter-area differentials Inter-firm differentials Reasons Differentials in sex, skills, age, knowledge, experience Varying requirements of skill, knowledge, demand-supply situation Cost of living, ability of employers to pay, demand and supply situation, extent of unionisation Ability of employer to pay, employees bargaining power, degree of unionisation, skill needs, etc.

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Choices In Designing A Compensation System

The compensation that is followed by a firm should be in tune with its own unique character and culture and allow the firm to achieve its strategic objectives. A variety of choices confront a firm here: Internal and external pay Fixed vs. variable pay Performance vs. membership

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Choices In Designing A Compensation System

Guidelines for effective performance based pay stems
To be fair to employees, organisations should keep the following guidelines in mind while instituting merit-pay systems Establish high standards of performance, so that only the truly outstanding employees emerge as winners.

Develop accurate performance appraisal systems. The focus must be on jobspecific, results-oriented criteria as well as employee behaviours.
Train supervisions in the mechanics of carrying out appraisals and offering feedback to employees in a proper way. Tie rewards closely to performance.

Use a wide range of increases. Also, make pay increases meaningful.

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Choices In Designing A Compensation System

Job vs. individual pay

Suitability of job based vs. knowledge based pay systems

A job based-pay system is suitable when: Jobs do not change often Technology is stable Lot of training is required to learn a given job Turnover is relatively how Employees are expected to move up through the ranks over time Jobs are fairly standardised within the industry Individual-based pay system is suitable when: The firm has relatively educated employees with both the ability and willingness to learn different jobs The firm's technology, processes are subject to frequent change Vertical growth opportunities are limited Opportunities to learn new skills exist Teamwork and employee participation are encouraged

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Broad banding vs. Competency based pay system

Organisations that follow a skill-based or Competency Based Pay System frequently use broad banding to structure their compensation payments to employees. Broad branding simply compresses many traditional salary grades (say 15 to 20 grades) into a few wide salary bands (three or four grades). By having relatively few job grades, this approach tries to play down the value of promotions. Depending on changing market conditions and organisational needs, employees move from one position to another without raising objectionable questions, (such as when the new grade is available, what pay adjustments are made when duties change etc.) As a result movement of employees between departments, divisions and locations becomes smooth. Employees with greater flexibility and broader set of capabilities can always go in search of jobs in other departments or locations that allow them to use their potential fully. Broad banding, further, helps reduce the emphasis on hierarchy and status. However, broad banding can be a little unsetting to a new recruit when he is made to roll on various jobs. Most employees still believe that the existence of many grades helps them grab promotional opportunities over a period of time. Any organisation having fewer grades may be viewed negatively as having fewer upward promotion opportunities. Moreover, a number of individuals may not want to move across the organisation into other areas.

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Choices In Designing A Compensation System

Below market vs. above market compensation Open vs. secret pay

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Managerial Compensation In India

Executive compensation is built around three factors in India Job complexity Employers ability to pay Managerial productivity

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Executive compensation: Private sector vs. Public sector

In a well publicised front page news sometime back The Economic Times mentioned about the miserable salary levels of top executives in public sector units in India. For example the State Bank of India chief is paid 10% of HDFC Bank Managing Director, BHEL's chief getting about Rs.10 to 12 lakhs per year as against ABB's MD getting nearly Rs.40 to 50 lakhs; Indian Oil Corporation's chief getting Rs.10 to 15 lakhs per annum as against Reliance Industries' Ambanis getting a package of over Rs.10 crore per annum. Salary levels in 'hot' private sector such as BPO, hospitality, biotechnology 'Media', IT, Telecommunications, Oil, Automobiles and Insurance are way above the packages offered to executives in public sector for various reasons such as: overstaffing, inefficient processes, pressure on margins due to competition, appointment of people without requisite skills at the top level, political interference especially in pricing the products or services, legal constraints etc.

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How to retain talent?

Improving communication Changing work rules Increasing pay and incentives Ego massaging services Non-poaching agreements

Opportunities to upgrade skills and knowledge

Offering jobs with stretch, pull and challenge

Compensation Administration