Compensation

Module 3 (2)

Compensation – Pay Structure – Executive Pay – Employee benefits.

Factors affecting Wage/salary levels, job evaluation, wage and salary survey, salary structure, salary fixation,

Incentives – Financial and Non-financial incentives –

Profit sharing , bonus concepts, ESOPs, pay for performance, benefits administration, employee welfare and working conditions – statutory and voluntary measures

CompensationRefers to all forms of financial returns and tangible benefits

that an employee receives as part of employment relationship

Pay structure It represents the wage or salary relationship with a

particular group of workers or tasks to be performed. The grouping can be on the basis of occupation and responsibility levels or on experience basis.

First of all the jobs are assigned values through the process of job evaluation. Thereafter these are placed in grades. The grades are arranged in hierarchical order starting with lower to higher jobs.

Thus wage/ salary structure consists of various salary/grades and their different levels of single jobs or group of jobs. For example:

Professor: Rs 16400- 450-20900-500-22400

Reader : Rs 12000-420-18300

Lecturer : Rs 8000-275-13500

The steps are:-1. Ascertain and establish most senior and most junior

jobs to be covered. 2. Draw up salary grade structure ranging from lowest

limit to highest limit along with the width of salary gaps.3. Make a job evaluation exercises 4. Procure market rate data5. Based on job evaluation results, market rate survey

and studies, arrange all jobs in the grades in an hierarchical order.

There are two more elements involved in a salary structure 1. Salary progression2. Broadbanding (reducing salary grades into limited

ones)

Methods to devise salary structure

The executive compensation in India is basically built around three important factors: - job complexity, employers ability to pay and executive human capital.

The companies structure executive compensation along the following factors: salary, bonus, commission, PF, family pension, superannuation fund, medical reimbursement, LTA, HRA, and other perquisites.

The latest trend is to enhance worth of an executives job through payment plans based on earnings/ assets or sales growth of the company supported by various allowances and perquisites including stock options, educational, recreational , academic allowances and development initiatives.

Executive pay

Managerial jobs require higher qualification, skill and knowledge and involve higher responsibilities, they need greater incentives to ensure to ensure greater commitment to their jobs.

In view of this certain fringe benefits are given solely to the mangers as added incentives to compensate for their skills and performance.

A US agency called Hay Group as suggested three factors namely accountability, problem solving and know-how as criteria to compensate the executives

It is also determined depending on the market value of the job, its relationship to other positions and the persons value to the organization based on performance and experience.

The factors affecting wages/ salary in organized sector are classified into four categories:

1. Wage enactments

2. Prevalent wage rate

3. Influence of trade unions

4. Corporate philosophy on wages

Factors affecting wages/ salary levels

Lantham has listed the following five factors:1. Cost of living2. Productivity3. Prevailing wage rates4. Ability to pay 5. Attraction and retention of employees

Job evaluation is a systematic method of appraising the value of each job in relation to other jobs in an organization.

Wendell French defines job evaluation as “a process of determine the relative worth of various jobs within the organization , so that differential wages may be paid to jobs of different worth. The relative worth of a job means relative value produced. The variables which are assumed to be related to value produced are such factors as responsibility, skill, effort and working conditions.”

Job evaluation

1. Provide a standard procedure for determining the relative worth of each job in a plant.

2. Determine equitable wage differentials between different jobs in the organization

3. Eliminate wage inequalities4. Ensure that like wages are paid to qualified employees

for like work5. Form basis for fixing incentives and different bonus

plans6. Serve as a useful reference for settling individual

grievances regarding wage rates

objectives of Job evaluation

The survey of wage/ salary is important to maintain external parity or external equity which can be both, intra and inter- industry pay rates. It is essential for the following reasons

1. Hiring and retaining competent employees2. Recognizing pay trend in the market place3. Defending pay practices in a court of law4. The pay survey can be of following types- can be

informal, external and commissioned. The external survey may be by job title, by job description and by job evaluation methods.

Salary survey

Wage fixation can be done through one of the following methods:

Adjudication, Wage Boards and Collective Bargaining

Wage Fixation

When collective bargaining and conciliation fail to resolve the wage dispute, the case is decided through voluntary arbitration or compulsory adjudication. The award is binding on both parties however the supreme court is final arbitrator.

Adjudication

Wage Boards- it has long history 1931 Royal commission on labor recommended to setup

wage board for determination of wage. 1st five year plan envisaged permanent wage board with

tripartite composition to be set up in each state and center. This did not materialised and wage disputes were settled through industrial tribunals.

2nd five year plan also considered wage board to be more acceptable machinery.

1957 – first wage board set up by government in cotton textile industry.

The pay structure of central govt employees is based on recommendations of pay commissions set up by central govt. The state govts. also broadly follow for their own employees whereas some set up their own pay commission.

On similar lines, for the central PSU’s “Mohan Committee” was set up to recommend pay structure and other fringe benefits to the employees of various central PSU’s

Pay commission

Legal aspect – the process of CB is not recognised under any of the Labour legislations including Trade Union Act, rather they put premium on Adjudication. However some state legislations do provide for CB. However, under Sec 2 (ra) Schedule V of the ID Act, refusal to bargain collectively, in good faith, with recognised union is unfair labour practice and is punishable under Sec 25 (u).

Collective Bargaining

Levels of Bargaining

1.Sectoral bargaining-

2. Industry cum region-wide agreement-

3. Plant/firm level (de-centralised)

INCENTIVES

What attracts and stimulates to perform. It can be both, financial or the non-financial.

According to National Labour Commission “wage Incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration, for improvements in the present or targeted results.

Incentives may be broadly classified

1. Financial incentives –

provides extra financial motivation by rewarding for performing more than the targeted work. E.g. overtime, incentive bonus, merit increments, promotion, fringe benefits, etc.

2. Non-financial incentives –

e.g recognition, status, appreciation, greater authority/ responsibility, improved working condition. This motivates worker to raise the productivity

The main features of incentives are:

1. Incentives are based on standard of performance of the job.

2. Measurable in monitory terms

3. Are ment to motivate workers for better an higher performance

4. Have direct linkage to performance

5. Varies from person to person and from time to time for the same person

features of incentives

The incentive schemes are usually based on three assumptions

1. Money is a strong motivator

2. Relationship between the effort and reward can be systematically establish

3. The feedback to employees is immediate and direct

The financial incentives may be classified as under1. Individual incentive scheme( PBR)

The PBR may be classified into four types-

a) incentive in the same proportion as performance b) incentives varying proportionately less than performance c) incentive varying proportionately more than performance d) incentive varying in proportion that vary with the level of

performance

Types of incentives

2. Group incentive schemea) Profit sharing ( in the form of current, deferred and

combination)b) Co partnership ( participation in profits as well as

management)c) Scanlon plan Developed by Joseph N. Scanlon , a lecturer in

Massachusetts institute of technology in USA in 1937 (the employees participate in the plan by submitting suggestions for cost cutting methods and increase in efficiency on account of cost cutting is shared by employees).

A. Statutory benefits - The Factories Act 1948- The Mines Act 1952- The Plantation Labor Act 1951- The Motor Transport Worker Act 1961- Employee’s State Insurance Act 1948- Workmen Compensation Act 1923

B. Voluntary benefits- these are determined and provided by the individual organizations based on their capability . The benefits may include educational facility, transport facilities, housing, recreation, consumer corporative society, subsidized lunch/ refreshment, child care, etc

Benefits

Establish Benefits objectivesEstablish Benefits objectives

Assess environmental factorsAssess environmental factors

Access competitivenessAccess competitiveness

Communicate Benefits information

Communicate Benefits information

Control Benefit Costs and Evaluation

Control Benefit Costs and Evaluation

EnvironmentEnvironment

Administration of Fringe Benefits

Statutory and voluntary measures

The labor welfare services can be broadly classified in two categories:

1. Within the organization( intra- mural) like medical, recreation, library, canteen, rest room, washing and bathing facilities, etc.

2. Outside the organization( extra – mural) like housing, transport, children's education, sports, holiday homes, leave travel facilities, interest free loan, etc.

Employee welfare and working conditions

Welfare facilities may be further classified into three basic categories

1. Economic services – like pension, life insurance, credit facilities, etc.

2. Recreational services

3. Facilitative services- like housing, medical ,education, transport, coperative stores, etc.

1. The Factories Act, 1984

a) washing facilities(S.42)b) facilities for storing and drying clothings(S.43)c) facilities for sitting(S.44)d) first aid appliances(S.45)e) canteen(S.46)f) shelters, rest rooms and lunch rooms(S.47)g) creches (S.48)h) welfare officers

Statutory provisions on employee welfare

2. Plantation Labor Act 1951

a) canteen( where 150 or more workers)(S.11)

b) creches (if fifty or more women)(S.12)

c) recreational facilities for workers and their children(S.13)

d) educational arrangements (if 25 children of age group 6-12)(S.14)

e) housing for every worker(S.15,16)

f) provision for umbrella, blankets, rain coats, etc( S.17).

g) welfare officer( S.18)

3. The Mines Act, 1952

1. Creches ( if 50 or more)2. Shelter for taking food and rest ( 150 or more)3. Canteen (250 or more)4. First aid boxes and first aid rooms( 150 or more)5. Pit head baths with shower baths, sanitary latrines and

lockers, separately for male and female workers