Compensation Administration System

Concept

Base wages & Salaries (hourly, weekly & monthly) Base wages foundation of pay structure Total compensation is calculated after these are fixed. TC= Incentive + Fringe Benefits + Base Salary Fair compensation Principle of Equity Matching employee expectancy

Principles Governing Compensation Administration

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Maintaining equity in the distribution of wages & salaries in the organisation Maintaining competitiveness in the wage market, in comparison to other players in the industry Matching employee expectations Reinforcing positive employee behavior & contribution to the organisation

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Eliminating any discrepancy in wage administration in the organisation Devising a system that is the most efficient for the organisation Optimization of management & employee interests Maintaining good industrial relations & harmony, with respect to compensation

Purpose of compensation administration

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To satisfy employees needs To meet their expectations in order to motivate & retain them Attracting talented resources Financial management Legal requirements

Different types of Wages

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Minimum Wage: it is amount of remuneration which is just sufficient to enable an average worker to fulfill all his/her obligations. It can be either minimum piece rate or minimum time rate. Fixed by government & enforced by law Revised in every 5 years on the basis of consumer price index

In India it is governed by the Minimum Wage Act, 1948 Employees are entitled to minimum wage at all times & under all circumstances Employer who cannot pay the minimum wage has no right to engage labor

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Minimum Wages are fixed on the basis of six norms: In calculating the min wage rate, the standard working class family should be taken to consist of 3 consumption units for one earner Min food requirement should be calculated on the basis of net intake of calories, for an average Indian adult of moderate activity

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Clothing requirements should be estimated at per capita consumption of 18 yards p.a The rent corresponding to the min area provided for under Governments Industrial Housing Scheme Miscellaneous expenses cover 20% of minimum wage Children education, medical requirements etc constitute 25% of minimum wage

Fair Wage
Workers performing work of equal skill/ difficulty/ unpleasantness should receive equal wages Related to earning capacity of the employer Workload in the organisation They are high than min wage

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Recommendations by the Committee on Fair Wages in India: The basis of fair wage is the min wage, within the capacity of the organisation to pay Fair wage should be related to the productivity of the labor It should match the prevailing rates of wages It should reflect the level of National income & its distribution

Living Wage
According to the Committee on Fair Wages, Living wages should enable the male earner to provide for himself and his family, (not only) the bare essentials of food, clothing & shelter, but also a measure of frugal comfort including education for the children, protection against illhealth, requirements of essential social needs & a measure of insurance against the more important misfortunes including old age.

Basic Wage Plans

Time wage plan Employees are paid for the period of time for which they have been employed. Quality of work is more important Work cannot be easily standardized Worker normally cannot earn more than fixed amount

Piece wage plan Workers are paid for the work done Employed where production of large numbers takes place Standardization of work is possible Work done is measurable Workers earnings are in direct proportion to his productivity

Payment by results Workers are paid once the work is completed

Skill-based pay Employees are paid for their job related skills Knowledge based pay Usually companies hire employees at below market-rates Promoted & rewarded once they gain knowledge & new skills

Competency-based pay Competency can be defined as the knowledge, skills & behavior Competencies of the best performing employee are identified vis a vis the job & the employee is compensated for these competencies Others are also compensated on the basis of these competencies

Variable compensation

Variable compensation programs are designed to pay employees in accordance with their performance & not in accordance with their position in the organisational hierarchy It differentiates between performers & non performers Employees are themselves responsible for their own pay packages, through their performance & contribution

Components of VC production incentives, profit sharing, bonus etc Variable compensation is paid at different levels, worker level, manager level & group level Worker level: is rewarded acc to the piece rate or time rate

Manager level: rewarded for achievement of results through monetary or non monetary incentives Group level: the whole group is rewarded for its performance

Wage differentials

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Difference in wages paid for same or similar work because of various reasons like difference in work schedules, cost of living etc Exists at various levels Individual level: competence, gender, experience etc

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Organizational level: size, business cycle etc Industry level: business trends Regional: countries

Concept of Rewards

Rewards are those that the employee earns as a result of his employment with the organisation Usually they are linked with performance & commitment to the organisation Rewards can be extrinsic and intrinsic rewards Extrinsic rewards are tangible in nature & under the control of organisation like promotion or bonus

Intrinsic rewards are intangible in nature & internal to the individual like challenging assignments Rewards can be classified into financial and non financial Incentives are the rewards to an employee, over & above his salary in recognition of his performance & contribution Benefits are the rewards an employee receives for his employment & position in the organisation

Incentive Plans
Incentive plans are of two types: 1. Short term plans: related to employee productivity over a short period of time 2. Long term incentive: related to employee performance over a long period, normally a year

Short-Term Plans
Based on time and piece rate system 1. Halsey plan: a certain amount of work is fixed as a standard output, which is to be completed in a prescribed time. A worker receives a percentage of wages as extra earnings, if he completes work before the prescribed time

Rowan plan: The worker is guaranteed a minimum wage on a time basis. Then a standard time is fixed for the completion of work and if the worker completes it before time, he earns more for the time saved

Task Bonus System: generally used for groups. The task of each group is predetermined and he has to achieve it to earn a bonus above his standard pay. Gantt method is used for bonus calculation Point rating system: each job is rated in terms of a standard time. At the end of the specified period the output of each worker is assessed.

Progressive Bonus: under this system of incentive payment, the earnings increase at a progressive rate once the output crosses the min or standard output

Long term plans

Annual Bonus: based on the annual performance of the company. The Payment of Bonus Act was passed in 1965, thus making Bonus statutory in companies Profit sharing: employees earn a share of the companys profit, which is normally calculated as a percentage of the total profit. It is of three types

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Distribution plan: annual or quarterly cash bonus is paid according to a predetermined formula Deferred plan: employees earn profit sharing credits instead of cash payment which are distributed when the employee parts with the organisation Combination plan: employees are allowed to receive a portion of each period profit as cash bonus with the remainder put in deferred plan

Gain Sharing: this is a method of rewarding groups for their successful performance. A group is entitled for their gain sharing even if the firm has not recorded its profit Employees stock option plan: employees are given a part of ownership at a price lower than the market price

Non- Monetary Incentives

Social or informal recognition of an employee for his contribution A challenging assignment Giving additional responsibility to an employee Free gifts and free vacations Awards

Employee Benefits
Free or subsidized lunches Medical facilities Paid holidays/ vacation to the employee & his family Retiral benefits like PF and Gratuity Employee insurance Maternity leave Child care centres

Educational allowance for children Company accommodation Transportation Study leave Company sponsored study Interest free loan