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Compensation
Pay is a statement of an employees worth by an employer. Employee compensation refers to all forms of pay or rewards going to employees and arising out of their employment. The term compensation is a comprehensive one including pay, incentives, and benefits offered by employers for hiring the services of employees.

Total Compensation

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Direct
Wages / Salaries Commissions

Indirect
Time Not Worked Vacations Breaks Holidays Insurance Plans Medical Dental Life Security Plans Pensions Employee Services Educational assistance Recreational programs

Bonuses

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The Bases for Compensation

Hourly Work Work paid on an hourly basis. Piecework Work paid according to the number of units produced. It divides a workers target hourly wage by the standard number of units he or she is to produce in one hour. Then for each unit the worker produces, the person earns the calculated rate per piece. Salary Workers Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.

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Strategic Compensation Planning

Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. Strategic compensation planning goes beyond determining what market rates to pay employees to purposefully linking compensation to the organizations mission and general business objective. E.g. Wegmans Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-forperformance standard. Seeks to motivate employees through compensation.

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Three important aspects of strategic compensation planning: 1. Linking compensation to organizational objectives. 2. The pay for performance standard. 3. The motivating value of compensation.

Linking compensation to organizational objectives

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The organization must manage compensation programs in ways that employees are motivated to make meaningful contribution while assuming ownership of their jobs. Formalized compensation goals serve as guidelines for managers to ensure that wage policies achieve their intended purpose.

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Common Goals of a Strategic Compensation Policy

To reward employees past performance To remain competitive in the labor market To maintain salary equity among employees To mesh employees future performance with organizational goals To control the compensation budget To attract new employees To reduce unnecessary turnover

Pay for performance standard

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Standard by which organizations tie compensation to employee effort and performance. The term pay for performance refers to a wide range of compensation options, including bonuses, salary commissions, team/group incentives etc. It serves to raise productivity and lower labor costs in todays competitive economic environment. .

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This seeks to differentiate between the pay of average performers and the outstanding performers. Eg: The Timber Company, emphasized on salary by forming new salary ranges based on each jobs impact on the business and incentive rewards linked more directly to individual and company performance

Motivating value of compensation

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Pay constitutes a quantitative measure of an employees relative worth. For most employees pay has a direct bearing not only on their standard of living, but also the status and recognition they may be able to achieve both on and off the job. Pay represents a reward received in exchange for an employees contributions, it is essential, according to the equity theory, that the pay be equitable in terms of those contributions.

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Motivating Employees through Compensation

Pay Equity (also Distributive Fairness) An employees perception that compensation received is equal to the value of the work performed. A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.

Individuals form a ratio of their inputs (abilities, skills, experiences) to outcomes ( salary, benefits) in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.

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Relationship between Pay Equity and Motivation

The greater the perceived disparity between my input/output ratio and the comparison persons input/output ratio, the greater my motivation to reduce the inequity.

Objectives of compensation planning

1. 2.

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3.

4.

With respect to compensation, managers should address four forms of equity: Internal equity: refers to how fair the jobs pay rate is, when compared to other jobs within the same company. External equity: This ensures that jobs are fairly compensated in comparison to similar jobs in the labor market. Individual equity: It ensure equal pay for equal work, i.e., each individuals pay is fair in comparison to others doing the same/ similar jobs, based on each individuals performance. Procedural equity: refers to the perceived fairness of the processes used to make decisions regarding the allocation of pay.

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The Compensation Structure

Step 1. The salary survey A survey of the wages paid to employees of other employers in the surveying organizations relevant labor market. Helps maintain internal and external pay equity for employees. Aimed at determining prevailing wage rates. A good salary survey provides specific wage rates for specific jobs.

.Purpose of the survey

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Collecting Survey Data

Outside Sources of Data
Bureau of Labor Statistics (BLS)
National Compensation Survey

State and local wage surveys Online survey data

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Collecting Survey Data

Conducting Employer-initiated Surveys Select key jobs. Determine relevant labor market. Select organizations. Decide on information to collect: wages/ benefits/ pay policies. Compile data received. Determine wage structure and benefits to pay.
.

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The Compensation Structure (contd)

Step 2. Job evaluation
A systematic comparison done in order to determine the worth of one job relative to another.

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The Compensation Structure (contd)

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.

Point method: the pay grade consists of jobs falling within a range of points.
Ranking method: the grade consists of all jobs that fall within two or three ranks. Classification method: automatically categorizes jobs into classes or grades.

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The Compensation Structure (contd)

Step 4. Price Each Pay Grade

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.
Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

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Plotting a Wage Curve

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Calculation of Market line using Regression Analysis y=a+bx y= dollars x= job evaluation points a= the y value (in dollars) at which x = 0 (i.e the straight line across y-axis) b= slope of line of best fit

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Market line can be written: Pay for Job A= a+ (b*job evaluation points for job A) www.math.csusb.edu/faculty/stanton/m262/r egress/regress.html

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The Compensation Structure (contd)

Step 5. Fine-tune pay rates It involves developing pay ranges and correcting out of line rates. Developing pay ranges Flexibility in meeting external job market rates Easier for employees to move into higher pay grades Allows for rewarding performance differences and seniority Correcting out-of-line rates Raising underpaid jobs to the minimum of the rate range for their pay grade. Freezing rates or cutting pay rates for overpaid (red circle) jobs to maximum in the pay range for their pay grade.

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Range spread is based on some judgment about how the organizations support career paths, promotions and other organization systems Range spread vary between 10 to 150%

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Once midpoint (based on the pay policy line) and the range spread (based on the judgment) are specified, minimum and maximum are calculated. Minimum = Midpoint / {1+(1/2 range spread)} Maximum= Minimum + (range spread x maximum)

WAGE STRUCTURE
9000 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 50 100 150

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200

250

300

Constructing Overlap
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Maximum rate grade A- minimum rate grade B --------------------------------------------------------Maximum rate grade A- Minimum rate grade B

Factors affecting wage and salary

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The main factors affecting wage and salary are: Demand for and supply of labor. Forces of demand and supply of labor determine the going wage rate. When there is no dearth of labor wages tend to be low. Ability to pay Depends upon the profit earning capacity of the enterprise. Cost of living. Due to inflation the real wages decline affecting the purchasing power of workers. Therefore, dearness allowance are given according to the changes in consumer price index.

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Prevailing wage rates While fixing wages prevailing wage in the particular industry region are taken into account. This is necessary to retain and attract qualified employees. Job requirements. Basic wages depend largely on the difficult level and mental effort required in a particular job. State regulation Wage policy and laws of government exercise a significant influence on wage levels. Government has enacted laws to protect the interests of the working class.

Components of compensation Business School Amity

Monetary compensation package of employees generally consists of the following components:

1. 2. 3. 4.

Basic Wage Allowances Incentives Fringe Benefits/ Perquisites

Basic Wage

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Generally determined through job evaluation. Depends on various factors like demand for and supply of labor, prevailing wage rates, ability to pay of employer. In India there are three concepts relating to basic wages:

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Minimum Wage- Supreme Courts Direction

To provide for sustenance maintenance of the worker and his family An employer who can not pay minimum wages has no right to exist.

Payment of less than min. wage amounts to forced labour.

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Fair Wage
The concept was deliberated upon by the Committee on Fair wages in 1948 The lower limit of fair wage is minimum wage and the upper limit is the capacity to pay Between the two, the actual wage will depend upon the following factors: (i) Productivity of labour (ii) Prevailing rates of wages in the same or similar occupations in the same or neighbouring localities (iii) Place of industry in the economy (iv) National income and its distribution

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Living Wage
It represents a standard of living which provides not only for bare sustenance, but: 1. A decent standard of life consistent with human dignity ( nutritious food, clean water, shelter, clothes, education, transport, etc.) 2. A measure of frugal comforts, amenities and a degree of leisure 3. Protection against ill health (health care) 4. Requirements of essential social needs 5. Some insurance against the more important misfortunes, and risks physical and financial, including old age ( social protection) Its a dynamic concept which aims at steadily improving living standards of working classes ( art 43 of the Constitution) Employers have a moral imperative to pay a living wage to workers

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Committee On Fair Wages ( 1948)

The Committee propounded wage concepts, such as minimum wage, fair wage, living wage etc.

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Components of Min. Wage-Dr. Aykroyds Formula

The standard working class family should be taken to consist of three consumption units for one earner, earnings of women, children and adolescents should be disregarded Minimum food requirements should be calculated on the basis of a net intake of 2700 calories for an average adult of moderate activity

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Components of Min. Wage (contd)

Clothing @ 18 yards/ anum.4= 72 yards Housing- minimum rent charged by the govt. in any area for the houses provided under the subsidized industrial housing for low income groups Fuel, lighting and other miscellaneous items of expenditure should constitute 20% of total minimum wage

Allowances
1.

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Dearness allowance: Allowance paid to enable them to face the increasing dearness of essential commodities. Paid to neutralize the effects of inflation. House Rent Allowance: Employers who do not provide living accommodation pay HRA to employees. City Compensatory Allowance: This allowance is generally paid to employees in metros or big cities where cost of living is comparatively high. Transport Allowance.

2. 3.

4.

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Incentives: commission on sales. Fringe Benefits: PF, Gratuity, encashment of earned leave, company house, company car, medical aid, interest free loan, holiday homes, stock options.

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Legal framework of Wage

P.W. Act 1936 M.W. Act 1948 Equal Remuneration Act 1976 Payment of Bonus act 1965 Provident Fund Act 1952 Payment of Gratuity Act, 1972 Employees State Insurance Act 1948 Maternity Benefit Act, 1961 Workmens Compensation Act, 1923