Wage and Salary Administration

- Nora Bhatia

Compensation : concept and context

Compensation
Why :
Rewards that motivate employees to perform Help foster the values, culture, behavior required Achievement of business objectives Attract and retain talent Sense of commitment to the orgn Acquire a competitive advantage
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Compensation
Direct compensation : financial remuneration, usually cash. Basic, DA, Shift allowance, bonus, incentives etc Indirect compensation : benefits like PF, Pension, medical, health insurance, sick leave

Compensation
Internal equity : wage differentials reflect the degree of difficultly. Corresponds to the difference in the evaluated contents of the job External equity : wage rate in an orgn is commensurate with wage rate for similar jobs in the industry, region

Functions & responsibilities of a compensation program

Formulate compensation plans Job evaluation system Ascertain going rates for jobs across the industry Make policy recommendations Supervise and maintain records pertaining to all matters of compensation Framing a compensation policy aligned to business goals and objectives Promote team and unit performance
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Corporate compensation policy

Strategy of wage increase : productivity linked / cost reduction factor Rationality and hygiene factors : linked to job outcome Internal equity External equity Review : evolutionary process Managerial compensation
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Issues and current trends

Broad banding : greater flexibility Pay for knowledge, skills and competency (Ph.D, MBAs) Team pay plans Coping with change : increasing expectations, multi-skilled

Group work and discussion

Wage Theories
Subsistence theory :
David Ricardo Price of labour depends on the subsistence of labour Price equals to the amount of commodities required to feed, clothe a worker and to subsist and perpetuate his race Labor like any commodity can be bought and sold Supply less : higher than subsistence wage, more children, back to subsistence wage Supply high : lower than subsistence wage, fewer children, back to subsistence wage
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Wage Theories
Surplus value theory :
Karl Marx Tendency of the capitalist, chronic unemployment and existence of industrial reserve army that kept wages at subsistence level Supply of labor always tended to be kept in excess Worker did not get full compensation for work done Rate of surplus labor which is the ratio of surplus labor to necessary labor is called rate of exploitation

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Wage Theories
Wage fund theory :
Adam smith Wage fund assumed to be fixed Any change in wages was due to the number of workers seeking employment

Bargaining Theory :
John Davidson Upper limit (beyond which employer will incur losses)
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Wage Theories
Purchasing power theory :
High wage rate : more purchasing power, increase in demand and thus higher output Low wage rate : less purchasing power, fall in demand will affect employment and output

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Behavioral Theories
Content theories : What motivate people to work Hierarchy of needs : Abraham Maslow Two factor theory Friedrich Herzberg Hygiene factors
company policy and administration supervision technical salary working conditions
If absent will lead to employee dissatisfaction
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Behavioral Theories

Two factor theory Friedrich Herzberg Motivating factors

recognition work itself responsibility advancement
If present can lead to employee satisfaction and motivation

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Wage Theories
ERG theory
Clayton Alderfer Existence (survival or physical being Relatedness (interpersonal) Growth (personal development)

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Process theories
Motivation and effort : the relation Expectancy theory : Victor Vroom
An individuals preference for a particular outcome Youngsters : single, unmarried, lesser need for childrens education, health benefits, travel concessions Senior employees : retiral benefits, health insurance,
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Equity theory
Inequity occurs when a person perceives that the ratio of his/her outcomes to inputs and the ratio of a relevant others outcomes to inputs are unequal. Persons outcomes Others outcomes Persons inputs <=> Others inputs
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Key considerations : public policy

Fix statutory minimum wages Equal pay for equal work Regulate wages to reduce disparities Compensate for rise in cost of living Capacity to pay : Supreme court an employer who cannot pay minimum wages has no right to exist
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Key considerations : public policy

Practical problems :
Minimum wage : organized and unorganized sector Possible to pay for ones need, not his greed Labour cost and productivity : ITC cost per cigarette at the same level for a 5-year period Merit and seniority progression : time bound promotions ? Motivation : money may not be everything but everything else is way behind Integrity : compensate them adequately enough to keep them out of temptation
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Group work and discussion

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Legal framework of wage and salary administration

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 Minimum wage : not only for bare subsistence but also for preservation of efficiency and providing some measure of medical, education, etc Living wage : protection against ill-health, requirements of essential social heads, insurance against some future misfortune, etc Fair wage : Lower limit is minimum wage and upper limit is the capacity of the industry to pay. Between these two the actual wage depends on : prevailing wage rate, productivity of labour, place of the industry in the national economy
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Wages defined in different enactments Payment of wages Act 1936

"wages" means all remuneration (whether by way of salary, allowances, or otherwise) expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes(a) any remuneration payable under any award or settlement between the parties or order of a court; (b) any remuneration to which the person employed is entitled in respect of overtime work or holidays or any leave period; (c) any additional remuneration payable under the terms of employment (whether called a bonus or by any other name); (d) any sum which by reason of the termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment of such sum, whether with or without deductions, but does not provide for the time within which the payment is to be made; (e) any sum to which the person employed is entitled under any scheme framed under any law for the time being in force,
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Wages defined in different enactments

but does not include (1) any bonus (whether under a scheme of profit sharing or otherwise) which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or order of a court; (2) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the State Government; (3) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon; (4) any travelling allowance or the value of any travelling concession; (5) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; or

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Wages defined in different enactments Minimum wages Act 1948

wages" means all remuneration, capable of being expressed in terms of money, which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment [and includes house rent allowance], but does not include(i) the value of(a) any house, accommodation, supply of light, water, medical attendance, or (b) any other amenity or any service excluded by general or special order of the appropriate government; (ii) any contribution paid by the employer to any pension fund or provident fund or under any scheme of social insurance; (iii) any travelling allowance or the value of any travelling concession; (iv) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or (v) any gratuity payable on discharge;

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Payment of wages Act : 1936 Payment of bonus Act 1965 Minimum Wages Act 1948 Payment of Gratuity Act 1972

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Compensation structure and differentials

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DA COLA CPI Incentive payments :

Individual payment by result Group payment by result scheme Enterprise level schemes

Managerial Incentive Plans

Percentage of profit Shares on concessional rates Bonuses in cash or kind (discount coupons, paid holidays, etc)
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Fringe benefits
Humanistic consideration : education, health, housing Statutory : canteens, rest sheds, crche, maternity, paternity, Security : Gratuity, PF, Pension, Medical Hazard of industrial life : ESIC, workmen compensation act, Hospitals Tax considerations : transport, interest free loans, loans at concessional rates Utilization of leisure time : holiday homes, foreign trips, guest houses Inculcating a sense of involvement : concessional lunch, subsidized picnics
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Legal framework
Tripartite boards :
Employers, workers, govt representatives

Lok Adalats Grievance redressal mechanisms

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Collective bargaining
Levels of bargaining :
Sectoral bargaining at national level : govt is a long term player.
Long term settlements Banks, coal, ports

Industry cum region wide agreements :

Cotton, jute, textile, tea

Decentralized firm/plant level agreements

Duration : 3-4 years Trends : something for nothing, something for anything, something for something, nothing for nothing
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 Pay commissions :
Central govt employees Recommendations Govt usually take economic decisions on political considerations

Wage Boards
Constitution : (equal number of representatives : employee, employer and 2 independent members economist, consumer representative Functions of the wage board Procedure Award of the wage board Enforcement of the award
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Group work and discussion

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Job evaluation
Right man for the right job Right pay for the right job

Method to determine the relative worth of a job

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Job evaluation
Job analysis : breaking down to tasks, functions, processes, operation and elements Job Description : description of a job based on job analysis Person / job specification : statement of content of job based on JD Job grading : ranking of a job based on JA Job classification : grouping jobs according to their worth Job assessment : monetary value on the basis on job grading
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Job evaluation
Objectives :
Primary :
Establish wage level of a plant Bring new jobs in parity with existing jobs Facilitate wage negotiations

Secondary :
Criteria for merit rating and promotion Scope for automation and improvement Analyse wage rates
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Job evaluation
Procedure :

Select the group of jobs Study the job job analysis Prepare the job description Device an evaluation plan (education, experience, responsibilities) Committee of raters / evaluate Group / classify the jobs Convert job grades to money value Obtain approval from union and management Establish a grievance procedure

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Job evaluation methods

Ranking method :
All jobs are ranked in order of complexity, responsibility and demands on respective employees Made easier by identifying those at the two extreme ends and then the middle region Ranking more than once arrive at final ranking Simplest method and less time consuming
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Job evaluation methods

Classification method :
Grades are established JDs description and nature of the job Jobs are classified into one of the other grades Less time consuming, comparatively easier. Irrational in the absence of logic and sometimes similar (nearby) jobs are put in different classes
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Job evaluation methods

Point rating method :
Job is analysed through 5-8 factors and 20-30 sub factors Given points which total out as the overall position of the job Not scientific but systematic. Outcome in hard numbers Time consuming Plan for clerical employees is not suitable for factory operators (physical effort is not essential as against a sedentary job) In a sophisticated process plant, the factor of mental/visual effect will have a higher weightage as against physical effort
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Job evaluation methods

Factor comparision method :
Factors or elements of a job are evaluated in terms of monetary value, eg. Mental requirement, skill, physical requirement, responsibility and working conditions Internal / external comparision of job are considered Conflict may arise on the valuation of each factor
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Job evaluation other methods

Time span of discretion methods
Effect of decisions is felt after a period of time A decision by :
Unskilled worker - few hours Marketing manager 1-2 years Board of director 4-5 yrs

Decision band method : type of decision

Band E policy making decisions top mgmt Band D programing decisions sr managers Band C interpretive decisions middle managers Band B routine decisions skilled operators Band A automatic decisions (when, how, where) semi skilled workmen Band O Defined decisions by unskilled workmen
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Group work and discussion

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Compensation Survey
Informal surveys External surveys Commissioned surveys External survey method :
Job title method Job Description method Job evaluation method

Process :
Selection of jobs for wage survey Organizations to be included Information to be collected

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Compensation Survey
Benefits :
Compare pay structure Entry level pay scales Pay differentials in select jobs Info on employee benefits Trends in compensation

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Reward systems, incentives and pay restructuring

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Merit incentive pay

Determination of result-oriented merit rating procedures Identification of job factors Scale of reward Communication on the basis of monetary reward
Salesman (sales promotion, collection of outstandings, good will calls, after sales service
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 Incentive schemes
Select the objective Determine the parameters of performance Determine the performance-reward relationship Determine the maximum payable incentive amount Formulating a communication and review scheme

Group incentive and productivity sharing Long term incentive (ESOP) Competency based pay

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Steps in designing incentive schemes

Custom tailored Objectives (short long term) Selection of performance measures behaviors considered important for organizational performance (increasing output, reducing labor, other costs, improving quality) External influences (changes in production methods, product mix, prices of inputs, outputs) Distribution avoid absenteeism varied with number of days/hours worked Equity equal opportunity for all to earn Involvement and communication Union participation Review
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Incentive schemes Issues and Trends

Levels of education which scheme will be easily understood and motivate them Trade union Organizational culture team spirit and involvement Monetary and non monetary incentives Rewarding good performance enriched role, publicity in newsletter
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Group incentives
Advantages :
Better co-operation Less supervision Reduced incidence of absenteeism Shorter training time

Disadvantages :
Efficient worker may be penalized for the inefficiency of other members Incentive may not be strong enough Rivalry amongst group members, defeats the 52 purpose

Incentives
Merits :
Motivation Enhanced earnings Productivity improves Reduced supervision Better utilization on equipment Reduced scrap Reduced absenteeism and turnover
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Incentives
Demerits :
Maintenance of quality checking and inspection Jealousies some earn more than others May oppose introduction of new machinery / processes

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Incentives pre-requisites
Co-operation of workers in the implementation Scientific work measurement Indirect workers, like crane operators, helpers, store keepers should also be covered Need for greater planning
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Incentives systems
The Halsey system standard time to complete a task
Minimum wage is guaranteed Time saved in completion of a task Usually @50%

Taylor differential piece rate system

Expected to do certain units within a certain period of time Encourages the efficient worker with a higher wage rage Penalizes the inefficient with a lower rate of payment Seldom used now 56

Incentives systems
Premium and task bonuses :
Workers who complete the task in std time or less receive wages for the std time plus a bonus When a worker fails to turn out the required quantity he simply gets the wage rate and no bonus

Profit sharing system

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Incentives systems
Scanlon Plan :
Developed by Joseph Scanlon of United steel workers of USA Adopting a measure for increased productivity Sharing the gain from that increased productivity Promotes teamwork High flexibility in generation of decisions and execution of the plan
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Group work and discussion

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Stock Options
Merits
Attraction Retention Motivation Financial participation of employees in wealth created through joint efforts Commitment Develop a common purpose / ideology between employees and employers
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Dearness allowance
Not linked to CPI
Flat rate : payment is a method under which a fixed amount is paid to employees irrespective of their categories and wage scales Graduated scale : DA increase which each scale of salary increase but after a limit there is no increase in the amount of DA.
A minimum amount of DA is also set for workers in each scale below which DA is not allowed to fall
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Dearness allowance
Linked to CPI
Flat rate : rate per point with variations in points of CPI As a percentage of pay :
DA is fixed DA is expressed as a fixed percentage of pay and equated to a scale of points of the CPI

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Other allowances
HRA LTA/LTC Washing allowance Conveyance Shift allowance Cash handling allowance Lunch / dinner allowance City compensatory allowance OT allowance

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Fringe benefits
Holiday homes Medical facilities Subsidized meals Low interest loans

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Downsizing
External reasons :
Structural and other changes in the economy Changes in technology Changes in ownership and control Business process re-engineering

Internal reasons :
Improper / inadequate HR planning Wrong selection / recruitment Inadequate training Substitution of labour with capital
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Approaches to deal with worker redundancy

Worker flexibility with employment security multi-skilled Review job specifications at regular intervals skill requirements Employment practices perpetuate obsolescence heirs

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Measures to avoid downsizing or minimize job losses

Restrictions on hiring for a limited period Spreading reductions over time Training and retraining VRS Counselling and outplacement

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VRS
Cost and benefits to company :
Relative health of the enterprise something is better than nothing Real cost to the company less skilled, less motivated under-performers may not leave as they may not get better opportunities elsewhere

Cost and benefits to employees

Golden parachute : secure investment Family obligations substantial amount spent in repaying debt
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How to go about a VRS ?

Should be the last option rather than first traumatic experience Identify who will be covered, who not, who will opt, who will not Awareness. Share the info with employees, union, communication channels Communication and counselling Phased manner to avoid massive reduction in manpower. Cash flow effect
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VRS should cover the following aspects

Applicability Eligibility Effective date of the scheme Duration of the scheme Compensation and benefits Procedure for application, acceptance and withdrawal Mode of payment Due date for payments Procedure for redressal of grievances/settlement of disputes
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Group work and discussion

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Emerging issues and trends

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Tax planning
A conscious well thought out process of arranging ones financial affairs Taking advantage of deductions, exemptions, rebates Minimizing tax liability Without infringing on any provision tax avoidance
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Composition of compensation package

Salary payment for services rendered Relationship employer / employee (power on selection, payment, kind of work, supervision, dismissal Salary v/s wage Allowances : payments by employer by way of allowances for personal benefit of the latter chargeable to IT.
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Composition of compensation package

Perquisites : gain / profit incidental from employment in addition to regular salary / wages. Attached to an office or employment Payable only on continuance of employment / service Ceases when employment comes to an end
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Tax implications of compensation

Salary Allowances :
HRA Conveyance Travelling allowance

Perquisites :
Rent free accomodation Company owned car Furniture LTC / LTA Medical
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Tax implications of compensation

Non taxable perquisites :
Refreshments provided during office hours, in office premises Subsidized lunch in canteen Goods manufactured sold to employees at a discount Subsidized transport office : residence Premium : Group insurance / Personal Accident Insurance
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Emerging Trends
Comparative international compensation Job content related compensation : link annual increment to performance Performance related compensation : performance based annual increment and periodic incentive linked to individual / group performance. Allows risk of business to be shared with employees
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Emerging Trends
Competency based compensation
Job holders competencies not the worth of the job Predictor of superior performance Acquisition of competencies : improvement in results significantly

Stock options Profit linked bonus

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Paradox of performance related compensation

Motivates those with high performance ratings May help retain high performances, though no evidence that poor performers have left the organization Fairness Clear linkage between effort and performance and performance and reward
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Broad pay bands

Progress from one level to another with demonstration of requisite competencies Must be based on competencies that drive superior performance Clear about requirements to move to the next level

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 360 degree feedback

Select the feedback tool Select the raters Use the feedback Review the feedback Integrate the process into a larger PMS

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Competency
It is derived from the Latin word Competere, which means to be suitable. The concept was orginally developed in Psychology denoting Individuals ability to respond to demand placed on them by the environment.

Competencies defined
A collection of characteristics (i.e. skills, knowledge and selfconcept, traits, behaviour, motivation, etc.), that enables us to successfully complete a given task.

Skills

Knowledge

Self-concept (Attitude)

Iceberg Model of Competencies

Competency based compensation

Knowledge, skills, attitudes, personal traits that drive superior performance Describes what makes people effective in a given role Behaviors associated with superior performance

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Concept of career stages

Stage 1 (Dependency)

Willingly accepts supervision Competent at detailed and routine tasks Able to perform well under time / budget pressures Learns how of doing things
Assumes responsibility for definable projects Relies less on supervision, works independently Develops credibility and a reputation Develops as an innovator
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Stage 2 (Independence)

Concept of career stages

Stage 3 (Contribution through others)
Stimulates others through ideas and knowledge Mentor in developing others Leader in team performance

Stage 4 (Leadership through vision)

Provides direction to the orgn Represents the orgn on critical strategic issues Champions significant technology and product
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Communication : levels of achievement

Level 1 Level 2 Level 3 Level 4

Under some supervision and / or guidance effectively uses written and verbal communication

Independently maintains excellent communication with all appropriate parties. Has strong technical credibility within the group

Communicates effectively across functional boundaries to add value to the business and gain support for recommendations

Uses communication skills and personal credibility to shape long term technical direction and other significant business decisions

Linking pay to achievement

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Group work and discussion

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Traditional v/s competency based model

Reward component Traditional system competency based system Based on internal job evaluation and Based on competency level demonstrated by market survey employee greater width and depth employee adds to core business

Basic Pay

Progression - basic pay

one more year of service

Variable pay

share of the employee as a partner in the privilege of membership of the group success of the business
company decides as a matter of policy Does what is told. Labour is important, not ideas Job for loyalty Employees share for undertaking risk and accountability

Benefits

Quality of work life Career opportunity

Empowered Mutually responsible, employability

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Compensation issues :
Employers : productivity Employees : cost of living Youngsters : now Senior employees : retiral benefits Take-home pay Net pay Pay comparison with co-workers / other industries
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Group work and discussions :

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Thank you ! All the best for the exams !

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