ABOUT COMPENSATION MANAGEMENT
INTRODUCTION
Compensation
management, also known as wage and salary administration, remuneration
management, or reward management, is concerned with designing and implementing
total compensation package.
Compensation is the human resource management function
that deals with every type of reward individuals receive in exchange for
performing an organizational task.
The consideration for which labor is
exchanged is called compensation.
Compensation is what employees receive in
exchange for their work. It is a particular kind of price, that is, the price
of labor. Like any other price, remuneration is set at the point where the
demand curve for labor crosses the supply curve of labor.
COMPENSATION
AND COMPENSATION MANAGEMENT
Compensation is referred to as money and other benefits received
by an employee for providing services to his employer.
Compensation refers to all
forms of financial returns: tangible services and benefits employees receive as
part an employment relationship, which may be associated with employee’s
service to the employer like provident fund, gratuity, insurance scheme and any
other payment which the employee receives or benefits he enjoys in lieu of such
payment.
According to Dale Yoder,
“Compensation is paying people for work”.
“Compensation is what
employees receive in exchange for their contribution to the organization”. –
Keith Davis
In the words of Edwin B.
Flippo, “The function compensation is defining as adequate and equitable
remuneration of personnel for their contributions to the organizational
objectives”.
Cascio has defined
compensation as follows;
“Compensation includes direct
cash payments, indirect payments in the form of employee benefits and
incentives to motivate employees to strive for higher levels of productivity”
Beach has defined wage and salary administration as follows;
“Wage and salary’
administration refers to the establishment and implementation of sound policies
and practices of employee compensation. It includes such areas as job
valuation, surveys of wages and salaries, analysis of relevant organizational
problems, development, and maintenance of wage structure, establishing rules
for administering wages, wage payments, incentives, profit sharing, wage
changes and adjustments, supplementary payments, control of compensation costs
and other related items.”
Compensation can be in the
form of cash or kind. Compensation may be defined as money received in the
performance of works, plus the many kinds of benefits and services that
organizations provide their employees.
Different Types of Compensation
There are different types of compensation. Schuler identified three
major types of compensation, which are mentioned below;
1.
Non-monetary Compensation.
2.
Direct Compensation.
3.
Indirect Compensation.
Non-monetary Compensation
It includes any benefit that an employee receives from an employer or a
job that does not involve tangible value. Examples are career development and
advancement opportunities, opportunities for recognition, as well as work
environment and conditions.
Direct Compensation
Direct Compensation comprises of the salary that is paid to the
employees along with the other health benefits.
Money is included under direct compensation. It is an employee’s base
wage which can be an annual salary or hourly wage and any performance-based pay
that an employee receives.
Direct compensation consisting of pay received in the form of wages,
salaries, bonuses, and commissions provided at regular and consistent
intervals.
These include the basic salary, house rent allowances, medical benefits,
city allowances, conveyance, provident funds, etc. It also includes bonuses,
payments for holidays, etc.
Indirect Compensation
Indirect compensation can be thought of as the nonmonetary benefits an
employee gets from the organization.
It includes everything from legally required public protection programs
such as Social Security to health insurance, retirement programs, paid leave,
childcare or moving expenses.
While benefits come under indirect compensation and may consist of life,
accident, health insurance, the employer’s contribution to retirement, pay for
a vacation, employer’s required payment for employee welfare as social
security.
Rewards and recognitions, promotions, responsibility, etc., are some
factors that induce confidence in the employees and motivate them to perform
better. It also instills the faith in them that their good work is being
recognized and they can boost their career opportunities if they continue to
work harder.
Objectives of Compensation Management
The basic objective of compensation management can be briefly termed as
meeting the needs of both employees and the organization.
Employers want to pay as little as possible to keep their costs low.
Employees want to get as high as possible.
Objectives of compensation management are;
1.
Acquire qualified personnel.
2.
Retain current employees.
3.
Ensure equity.
4.
Reward desired behavior.
5.
Control costs.
6.
Comply with legal regulations.
7.
Facilitate understanding.
8.
Further administrative efficiency.
9.
Motivating Personnel.
10.
Consistency in Compensation.
11.
To be adequate.
Compensation management tries to strike a balance between these two with
specific objectives;
Acquire qualified personnel
Compensation needs to be high enough to attract applicants. Pay levels
must respond to the supply and demand of workers in the labor market since
employees compare for workers.
Premium wages are sometimes needed to attract applicants working for
others.
Retain current employees
Employees may quit when compensation levels are not competitive, resulting
in higher turnover.
Employees serve organizations in exchange for a reward. If pay levels
are not competitive, some employees quit the firm. To retain these employees’,
pay levels must be competitive with that of other employers.
Ensure equity
To retain and motivate employees, employee compensation must be fair.
Fairness requires wage and salary administration to be directed to achieving
equity.
Compensation management strives for internal and external equity.
Internal equity requires that pay be related to the relative worth of a
job so that similar jobs get similar pay.
External equity means paying workers what comparable workers are paid by
other firms in the labor market.
Reward desired behavior
Pay should reinforce desired behaviors and act as an incentive for those
behaviors to occur in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility, and other behaviors.
Good performance, experience, loyalty, new responsibilities, and other
behaviors can be rewarded through an effective compensation plan.
Control costs
A
rational compensation system helps the organization obtain and retain workers
reasonable cost. Without effective compensation management, workers could be
overpaid or underpaid.
Comply with legal regulations
A sound wage and salary system considers the legal challenges imposed by
the government and ensures employers compliance.
Facilitate understanding
The compensation management system should be easily understood by human
resource specialists, operating managers and employees.
Further administrative efficiency
Wage and salary programs should be designed to be managed efficiently,
making optimal use of the HRIS, although this objective should be a secondary
consideration with other objectives.
Motivating Personnel
Compensation
management aims at motivating personnel for higher productivity.
Monetary compensation has its own limitations in motivating people for
superior performance. Besides money people also wants praise, promotion,
recognition, acceptance, status, etc. for motivation.
Consistency in Compensation
Compensation management tries to achieve consistency-both internal and
external in compensating employees. Internal consistency involves payment on
the basis of the criticality of jobs and employees’ performance on jobs.
Thus, higher compensation is attached to higher-level jobs. Similarly,
higher compensation is attached to higher performers in the same job.
To be adequate
Compensation must be sufficient so that the needs of the employee are
fulfilled substantially.
Pre-requisites for Effective
Compensation Management
An effective compensation system should fulfill the following criteria:
1.
Adequate: Minimum governmental, union,
and managerial pay level positions must be met by the compensation system.
2.
Equitable: Care should be taken so that
each employee is paid fairly, in line with his/her abilities, efforts,
education, training, experiences, competencies, and so on.
3.
Balanced: Pay, benefits, and other
rewards must provide a reasonable compensation package.
4.
Secure: Employees security needs must
be adequately covered by the
Objectives of Compensation Policy
The objectives of compensation policy are as follows −
·
Allure
suitable staff.
·
Keep
qualified personnel.
·
Develop
reward structures that are equitable with logical and fair pay relationships
between differently valued jobs.
·
Manage
pay structures to mirror inflationary effects.
·
Assure
that rewards and salary costs handle changes in market rates or organizational
change.
·
Appraise
performance, duty, and loyalty, and provide for progression.
·
Abide
with legal requirements.
·
Maintain
compensation levels and differentials under review and control salary or wage
costs.
Clearly, managing a firm's compensation policy is a complex task
as it facilitates systematically administered and equitable salaries,
reconciles employees' career aspirations with respect to earnings, aligns
employees' personal objectives with those of the organization, and keeps the
firm's costs under control.
To summarize, compensation management is a synchronized practice
that includes balancing the work-employee relation by facilitating monetary and
non-monetary benefits for employees.
Importance of Compensation Management
A good compensation is a must for every business organization, as
it gives an employee a reason to stick to the company.
An organization gains from a structured compensation management in
the following ways −
·
It
tries to give proper refund to the employees for their contributions to the
organization.
·
It
discovers a positive control on the efficiency of employees and motivates them
to perform better and achieve the specific standards.
·
It
creates a base for happiness and satisfaction of the workforce that limits the
labor turnover and confers a stable organization.
·
It
enhances the job evaluation process, which in return helps in setting up more
realistic and achievable standards.
·
It is
designed to abide with the various labor acts and thus does not result in
conflicts between the employee union and the management. This creates a
peaceful relationship between the employer and the employees.
·
It
excites an environment of morale, efficiency and cooperation among the workers
and ensures satisfaction to the workers.
In short, we can say that compensation management is required as
it encourages the employees to perform better and show their excellence as well
as provides growth and development options to the deserving employees.
Components of Compensation
Compensation as a whole is made up of different components that
work as an aid for an employee after retirement or in case of some accident or
injury. Now we shall see the key elements or components that make compensation.
Wages and Salary
Wages mark hourly rates of pay, and salary marks the monthly rate
of pay of an employee. It is irrelevant of the number of hours put in by an
employee working in the firm. These are subject to annual increase.
Allowances
Allowances can be defined as the amount of something that is
allowed, especially within a set of rules and regulations or for a specified
purpose. Various allowances are paid in addition to basic pay.
Some of these allowances are as follows −
·
Dearness
Allowance − This
allowance is given to protect real income of an employee against price rise.
Dearness allowance (DA) is paid as a percentage of basic pay.
·
House
Rent Allowance −
Companies who do not provide living accommodation to their employees pay house
rent allowance (HRA) to employees. This allowance is calculated as a percentage
of salary.
·
City
Compensatory Allowance −
This allowance is paid basically to employees in metros and other big cities
where cost of living is comparatively more. City compensatory allowance (CCA)
is normally a fixed amount per month, like 30 per cent of basic pay in case of
government employees.
·
Transport
Allowance/Conveyance Allowance − Some companies pay transport allowance (TA) that
accommodates travel from the employee’s house to the office. A fixed amount is
paid every month to cover a part of traveling expenses.
Incentives and
Performance Based Pay
Incentive compensation is performance-related remuneration paid
with a view to encourage employees to work hard and do better.
Both individual incentives and group incentives are applicable in
most cases. Bonus, gain-sharing, commissions on sales are some examples of
incentive compensation.
Fringe
Benefits/Perquisites
Fringe benefits include employee benefits like medical care,
hospitalization, accident relief, health and group insurance, canteen, uniform,
recreation and the likes.
In recent years, a great deal of attention has been directed to
the development of compensation systems that go beyond just money. We can say
that all the components of compensation management play a very important role
in the life of an employee.
In particular, there has been a marked increase in the use of
pay-for-performance (PrP) for management and professional employees, especially
for executive management and senior managers. Compensation is a primary
motivation for most employees.
Types of
Rewards
Reward system of a
company should also be in alignment with its goals, objectives, mission and
vision. On the basis of the job profile, both monetary and non-monetary rewards
can motivate employees to contribute more to the organization.
Monetary Rewards
A hike in salary,
incentives, movie tickets, vacation trips, monetary allowances on special
occasions, redeemable coupons, cash bonuses, gift certificates, stock awards,
free or discounted health check-ups for the complete family and school/tuition
fees for employees’ children come under this category.
Non-monetary Rewards
Non-monetary rewards
include awards, certificates, letters of appreciation, dinner with boss,
redecoration of employee cabin, membership of recreation clubs, perks, use of
company facilities, suggestion awards, tie-pins, brooches, diaries, promotion,
a say in management, etc.
A mixture of monetary
and non-monetary rewards works wonders and drive employees to act competently
continuously. A proper and efficient employee reward and recognition program
creates harmonious relationships between employees and the employer.
Flexible Pay
The practice of
relating pay to performance has been around for a while. However, what’s new is
that the percentage of pay that is related to performance and the way in which
the same is structured around different elements of performance.
One of the key
elements of this flexible pay plan is the strategy of relating pay to
performance. This strategy has been followed by many multinational companies
worldwide and consists of the overall pay structure being broken down into
elements.
The variable pay
would be paid out as a percentage of the complete package, subject to the
performance of the employee. For instance, if the employee gets a grade of 3 on
a scale of 1 to 5 (with 1 as the highest and 5 and the lowest grade), the
variable pay would be 60-70% of the eligible amount and if the employee gets a
grade of 2, the variable pay would be 110-120% of the eligible amount. The
variable component of the salary is determined according to the performance of
the employee.
The international
practice is to increase the element of the variable pay more than the
hierarchy. This would state that at senior levels of the employee hierarchy,
the variable component can be as high as 50-60% of the overall pay.
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