COMPENSATION MANAGEMENT

www.eiilmuniversity.ac.in

Subject: COMPENSATION MANAGEMENT

Credit: 4

SYLLABUS

Objectives of Compensation

Introduction to Compensation and Rewards; Objective of Compensation and Rewards; Introduction to

Framework of Compensation Policy; Labor market characteristics and pay relatives

Wage Determination:

Introduction to Compensation, Rewards, Wage Levels and Wage Structures; Introduction to Wage

Determination Process and Wage Administration rules; Introduction to Factors Influencing Wage and Salary

Structure and Principles of Wage and Salaries Administration; Introduction to the Theory of Wages:

Introduction to Minimum, Fair and Living Wage

Wage Deferential

Introduction to Minimum Wages; Introduction to Basic Kinds of Wage Plans; Introduction to Wage

Differentials & Elements of a Good Wage Plans; Introduction to Institutional Mechanisms for Wage

Determination

Executive Compensation

Legalistic Framework for Wage Determination; Introduction to Importance of Wage Differentials; Introduction

to Executive Compensation and Components of Remuneration

Job Evaluation

Introduction to Nature and Objectives of Job Evaluation; Introduction to Principles and Procedure of Job

Evaluation Programs; Introduction to Basic Job Evaluation Methods; Introduction to Implementation of

Evaluated Job; Introduction to Determinants of Incentives; Introduction to Classification of Rewards; Incentive

Payments and its Objectives.

Wage Incentives

Introduction to Wage Incentives in India; Introduction to Types of Wage Incentive Plans; Introduction to

Prevalent Systems & Guidelines for Effectives Incentive Plans; Introduction to Non- Monetary Incentives

Profit Sharing

Introduction to Cafeteria Style of Compensation; Introduction to Problems of Equity and Bonus; Profit Sharing

& Stock Options; Introduction to Features of Fringe Benefits; Introduction to History and Growth Factors;

Coverage of Benefits; Introduction to Employee Services & Fringe Benefits in India

Benefit Programs

Introduction to Benefit Programs; for Management & Administration of Benefits & Services; Introduction to

Compensation Survey & Methodology; Introduction to Planning Compensation for Executives & knowledge

Workers

Tax Planning

Introduction to Tax Planning; Comparative International Compensation; Introduction to Downsizing; Voluntary

Retirement Scheme; Pay Restructuring in Mergers & Acquisition

Suggested Readings:

1. Human Resource Management, by L.M Prasad, Sultan Chand & Sons.

2. Personal & Human Resource Management, by P. Subba Rao, Himalaya Publishing House.

3. Human Resource Management, by K. Aswathappa, Tata McGraw Hill Publishing Company Ltd.

4. Bhawdeep singh & Prem Kumar- Current Trends in HRD: Challenges & Strategies in a changing

scenario.

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Accurate and updated information is the primary need of any

management practice. Study offers one such means of gathering

realistic information. A detail Study of such information and its

accuracy presents the usefulness of the information. The study

of compensation management is one of the basic facet of

Human huresource management.

The aim of this subject is to develop students understanding

of the concepts of compensation and rewards in the organiza-

tion . In particular the subject is designed to develop the

underpinning knowledge and skills required to understand the

one of the complex management functions i.e. compensating

employees and its importance. This subject introduces the

student to the basics compensation structure and differentials.

It familiarizes the students with the practice of various manage-

ment techniques and its expected results like job evaluation etc.

The learner is apprised about the latest issues in management

related to compensation in order to make the students abreast

about the recent trends in the area.

COMPENSATION MANAGEMENT (BBA)

COURSE OVERVIEW

The students on completion of the course shall develop the

following skills and competencies:

a. Should know the nature and scope of Compensation

management

b. Knowledge about essential elements of compensation

c. Awareness about the compensation structure and

differentials.

d. Techniques of job evaluation

e. Understanding the importance of fringe benefits

Awareness of the latest trends in compensation

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. Lesson No. Topic Page No.

Concepts and Issues

Lesson 1 Role of Compensation and Rewards in the Organization 1

Lesson 2 Objectives of Compensation and Rewards 5

Lesson 3 Frame work of compensation policy 9

Lesson 4 Labor Market Characteristics 13

Essential Elements

Lesson 5 Compensation Structure and Differentials 16

Lesson 6 Wage Determination process 19

Lesson 7 Wage and Salary structure 25

Lesson 8 Introduction To The Theory of wages 34

Lesson 9 Introduction To Minimum, Fair And Living Wage 37

Lesson 10 Introduction To The Minimum Wage 40

Lesson 11 Introduction To Basic kinds of Wage Plans 43

Lesson 12 Introduction to Wage Differentials & Elements of

a Good Wage Plan 46

Lesson 13 Institutional mechanism for wage determination 50

Lesson 14 Wage fixation 56

Lesson 15 Introduction To Nature and Objectives of Job Evaluation 61

Lesson 16 Nature and Objectives of Job Evaluation 66

Lesson 17 Principles and Procedure of job evaluation program 67

Lesson 18 Exercise on Job Evaluation 70

Lesson 19 Introduction to Basic Job Evaluation Methods/Systems

& Packaged Point Plans 76

Lesson 20 Job Evaluation Methods 81

Lesson 21 success of job evaluation 86

CONTENT

COMPENSATION MANAGEMENT

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Principles of External an Internal Differentials

Lesson 22 Objectives, Role, Importance of Rewards And Incentives 91

Lesson 23 Importance Of Rewards And Incentives 95

Lesson 24 Classification of Rewards and Incentives 98

Lesson 25 Guidelines for effective incentive plans 103

Lesson 26 Non-Monetary Incentives 108

Lesson 27 Cafetaria style of compensation 114

Lesson 28 Compensation Policy 118

Lesson 29 Fringe Benefits 122

Lesson 30 Fringe Benefits 124

Lesson 31 Concept of employee services And Fringe Benefits in India 128

Lesson 32 Administration of Benefit programme and services 133

Lesson 33 Concepts of Compensation Survey 136

Lesson 34 Planning Compensation for Executives And Knowledge Workers 141

Lesson 35 Concept of Superconductivity, SQUIDs and its applications 120

Latest Trends in Compensation Management

Lesson 36 Planning compensation for Managerial and Professional Jobs 147

Lesson37 Introduction To Downsizing 151

Lesson 38 Voluntary Retirement Scheme 158

Lesson 39 Pay Restructuring in Mergers and Acquisitions 164

Lesson 40 Case Study 169

Lesson 41 Towards understanding Industry and Labour in the post-MFA

Regime: Case of the Indian Garment Industry-M. Vijayabaskar 172

CONTENT

COMPENSATION MANAGEMENT

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Learning Objectives Understand the meaning of Compensation Know the role of Compensation management Importance and purpose of Compensation management in

organizationsIf the abilities of employees have been developed to the pointwhere they meet or exceed job requirements, it is nowappropriate that they be equitably compensated for theircontributions. The factors affecting the determination ofequitable compensation are many, varied and complex. Andmanagement must come to some decision concerning the basicwage or salary. To motivate improved performance on the jobmany systems of variable compensation have been devised andfinally organizations have developed numerous ways ofproviding supplementary compensation in the form of fringebenefits.

Now Students Lets Try to Define Exactly What

Compensation Is?Compensation is a systematic approach to providing monetaryvalue to employees in exchange for work performed.Compensation may achieve several purposes assisting inrecruitment, job performance, and job satisfaction.

Now lets Discuss how is Compensation used?Compensation is a tool used by management for a variety ofpurposes to further the existence of the company.Compensation may be adjusted according the business needs,goals, and available resources.

Compensation may be used to

Recruit and retain qualified employees. Increase or maintain morale/satisfaction. Reward and encourage peak performance. Achieve internal and external equity. Reduce turnover and encourage company loyalty. Modify (through negotiations) practices of unions.Recruitment and retention of qualified employees is a commongoal shared by many employers. To some extent, the availabilityand cost of qualified applicants for open positions isdetermined by market factors beyond the control of theemployer. While an employer may set compensation levels fornew hires and advertise those salary ranges, it does so in thecontext of other employers seeking to hire from the sameapplicant pool.Morale and job satisfaction are affected by compensation. Oftenthere is a balance (equity) that must be reached between themonetary value the employer is willing to pay and thesentiments of worth felt be the employee. In an attempt tosave money, employers may opt to freeze salaries or salary levels

at the expense of satisfaction and morale. Conversely, anemployer wishing to reduce employee turnover may seek toincrease salaries and salary levels.Compensation may also be used as a reward for exceptional jobperformance. Examples of such plans include: bonuses,commissions, stock, profit sharing, gain sharing.Employee compensation refers to all forms of pay or rewardsgoing to employees and arising from their employment, and ithas two main components. There are direct financial paymentsin the form of wages, salaries, incentives, commissions andbonuses and there are indirect payments in the form of financialbenefits like employee paid insurance and vacations.So in nutshell we can say that employee compensation refers toall the forms of pay or rewards going to employees and arisingfrom their employmentCompensation includes direct cash payments, indirect paymentsin the form of employee benefits & incentives to motivateemployees to strive for higher leveis of productivity is a criticalcomponent of employment relationship.Compensation is affected by many factors like labour marketfactors, collective bargaining, government legislation & topmanagement philosophy regarding pay benefits.

What is Compensation Management?Process of compensation management is to establish &maintain an equitable wage & salary structure & an equitable coststructure .it involves job evaluation, wage & salary survey, profitsharing &control of pay costs.Two important functions of compensation Equity function Motivation functionEquity is based on past & current performance& motivationwith which the work has been performed in the past & currentperformance.

Nature and Purpose of compensation managementThe basic purpose of compensation management is toestablish and maintain an equitable reward system. The otheraim is the establishment and maintenance of an equitablecompensation structure, i. e, an optimal balancing of conflictingpersonnel interests so that the satisfaction of employees andemployers is maximized and conflicts minimized. Thecompensation management is concerned with the financialaspects of needs, motivation and rewards. Managers, therefore,analyze and interpret the needs of their employees so thatreward can be individually designed to satisfy these needs. For ithas been rightly said that people do what they do to satisfysome need. Before they do anything, they look for a reward orpay-off.

UNIT-1CONCEPTS AND ISSUESLESSON 1:

ROLE OF COMPENSATION ANDREWARDS IN THE ORGANIZATION

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The reward may be money or promotion, but more likely it willbe some pay-off-a smile, acceptance by a peer, receipt ofinformation, a kind word of recognition etc.

Lets Talk About The Significance of CompensationFrom individual standpoint -remuneration is a major source ofan individuals purchasing power. It determines his or herstatus, prestige & worth in society.From enterprise stand point- compensation is a crucial elementin the cost of production, which is expected to permit adequateprofits leading to increase in new capital, expansion production,and capacity.From national point of view dissatisfied work force hampersequitable distribution of aggregate real income among variousgroup involved .it causes inflation.

A Sound Compensation Structure Tries to Achieve

These Objectives To attract manpower in a competitive market. To control wages &salaries & labour costs by determining

rate change & frequency of increment . To maintain satisfaction of employees by exhibiting that

remuneration is fair adequate & equitable.To induce & reward improved performance, money is aneffective motivator.

a.For employees

1. Employees are paid according to requirements of their jobs,i.e., highly skilled jobs are paid more compensation than lowskilled jobs. This eliminates inequalities.

2. The chances of favoritism (which creep in when wage ratesare assigned) are greatly minimized.

3. Job sequences and lines of promotion are establishedwherever they are applicable.

4. Employees morale and motivation are increased because ofthe sound compensation structure.

b. To Employers

1. They can systematically plan for and control the turnover inthe organization.

2. A sound compensation structure reduces the likelihood offriction and grievances over remuneration

3. It enhances an employees morale and motivation becauseadequate and fairly administered incentives are basic to hiswants and needs.

4. It attracts qualified employees by ensuring and adequatepayment for all the jobs.

Now we come to the principles of Compensation Differences in pay should be based on differences in job

requirements. Wage & salary level should be in line with those prevailing in

the job market. Follow the principle of equal pay for equal work. Recognize individual differences in ability & contributions.

The employees & trade unions should be involved in whileestablishing wage rates.

The wages should be sufficient to ensure for the worker &hisfamily reasonable standard of living.

There should be a clearly established procedure for redressalof grievances concerning wages

The wage & salary structure should be flexible . Wages due to employees should be paid correctly &

promptly. A wage committee should review & revise wages from time

to time.

What are the components of a compensation

system?Employees as fair if based on systematic components willperceive compensation. Various compensation systems havedeveloped to determine the value of positions. These systemsutilize many similar components including job descriptions,salary ranges/structures, and written procedures.The components of a compensation system include: Job Descriptions:A critical component of both

compensation and selection systems, job descriptions definein writing the responsibilities, requirements, functions,duties, location, environment, conditions, and other aspectsof jobs. Descriptions may be developed for jobs individuallyor for entire job families.

Job Analysis: The process of analyzing jobs from whichjob descriptions are developed. Job analysis techniquesinclude the use of interviews, questionnaires, andobservation.

Job Evaluation: A system for comparing jobs for thepurpose of determining appropriate compensation levels forindividual jobs or job elements. There are four maintechniques: Ranking, Classification, Factor Comparison, andPoint Method.

Pay Structures: Useful for standardizing compensationpractices. Most pay structures include several grades with eachgrade containing a minimum salary/wage and either stepincrements or grade range. Step increments are common withunion positions where the pay for each job is pre-determinedthrough collective bargaining.

Salary Surveys: Collections of salary and market data. Mayinclude average salaries, inflation indicators, cost of livingindicators, salary budget averages. Companies may purchaseresults of surveys conducted by survey vendors or mayconduct their own salary surveys. When purchasing theresults of salary surveys conducted by other vendors, notethat surveys may be conducted within a specific industry oracross industries as well as within one geographical region oracross different geographical regions. Know which industryor geographic location the salary results pertain to beforecomparing the results to your company.

Policies and Regulations

What are Different Types of Compensation?Different types of compensation include:

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T Base Pay Commissions Overtime Pay Bonuses, Profit Sharing, Merit Pay Stock Options Travel/Meal/Housing AllowanceBenefits including: dental, insurance, medical, vacation, leaves,retirement, taxes...In a laymans language the word Compensation meanssomething, such as money, given or received as payment orreparation, as for a service or loss. On the other hand, the wordReward means something given or received in recompense forworthy behavior or in retribution for evil acts.

Now students let us try to demarcate between

compensation and rewardsIn a laymans language the word Compensation meanssomething, such as money, given or received as payment orreparation, as for a service or loss. On the other hand, the wordReward means something given or received in recompense forworthy behavior or in retribution for evil acts.The word Compensation may be defined as money received inthe performance of work, plus the many kinds of benefits andservices that organizations provide their employees.On the other hand, the word Reward or Incentive meansanything that attracts an employees attention and stimulateshim to work. An incentive scheme is a plan or a programme tomotivate individual or group performance.An incentive programme is most frequently built on monetaryrewards (incentive pay or monetary bonus), but may alsoinclude a variety of non-monetary rewards or prizes.

Compensation or rewards (incentives) can be

classified into1. Direct compensation and2. Indirect compensation.Money is included under direct compensation (popularlyknown as basic salary or wage, i.e. gross pay) where theindividual is entitled to for his job, overtime-work and holidaypremium, bonuses based on performance, profit sharing andopportunities to purchase stock options.While benefits come under indirect compensation, and mayconsist of life, accident, and health insurance, the employerscontribution to retirement (pensions), pay for vacation orillness, and employers required payments for employee welfareas social security.While French says, the term Incentive system has a limitedmeaning that excludes many kinds of inducements offered topeople to perform work, or to work up to or beyond acceptablestandards. It does not include:1. Wage and salary payments and merit pay;2. Over-time payments, pay for holiday work or differential

according to shift, i.e. all payments which could be

considered incentives to perform work at undesirable times;and

3. Premium pay for performing danger tasks.It is related with wage payment plans which tie wages directly orindirectly to standards of productivity or to the profitability ofthe organization or to both criteria. Compensation representsby far the most important and contentious element in theemployment relationship, and is of equal interest to theemployer, employee and government.1. To the employer because it represents a significant part of his

costs, is increasingly important to his employeesperformance and to competitiveness, and affects his ability torecruit and retain a labor force of quality.

2. To the employee because it is fundamental to his standardof living and is a measure of the value of his services orperformance.

3. To the government because it affects aspects of macro-economic stability such as employment, inflation, purchasingpower and socio economic development in general.

While the basic wage or pay is the main component ofcompensation, fringe benefits and cash and non-cash benefitsinfluence the level of wages or pay because the employer isconcerned more about labor costs than wage rates per se. Thetendency now is towards an increasing mix of pay element ofexecutive compensation has substantially increased in recentyears.

Basic Purpose for Establishment of a Sound

Compensation and Reward AdministrationThe basic purpose of establishment of a sound compensationand reward administration is to establish and maintain anequitable compensation structure.Its secondary objective is the establishment and maintenance ofan equitable labor-cost structure, an optimal balancing ofconflicting personnel interests so that the satisfaction ofemployees and employers is maximized and conflictsminimized.

A sound wage and salary administration tries to

achieve these objectives

a.For employees

1. Employees are paid according to requirements of their jobs,i.e., highly skilled jobs are paid more compensation than lowskilled jobs. This eliminates inequalities.

2. The chances of favoritism (which creep in when wage ratesare assigned) are greatly minimized.

3. Job sequences and lines of promotion are establishedwherever they are applicable.

4. Employees morale and motivation are increased because awage programme can be explained and is based upon facts.

b. To Employers

1. They can systematically plan for and control their labor costs.

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2. In dealing with a trade union, they can explain the basis oftheir wage programme because it is based upon a systematicanalysis of job and wage facts.

3. A wage and salary administration reduces the likelihood offriction and grievances over wage inequities.

4. It enhances an employees morale and motivation becauseadequate and fairly administered wages are basic to his wantsand needs.

5. It attracts qualified employees by ensuring and adequatepayment for all the jobs.

Assignments1. Discuss the concept of compensation. What factors affect

compensation of employees in industrial organizations?2. What is the basic purpose behind the establishment of a

sound Compensation and Reward administration system inthe organizations?

Case studyRoshans Limited-Transport FacilityThe personnel Manager of Roshans Limited have received anapplication for the introduction of company conveyance foremployees staying in town. Although Roshans Limited hasprovided living facilities to its employees about 60 percent of its1000 employees still have to commute an average of 10 km tocome to work. The union and some of the employee s livingon campus have supported the demand . Though themanagement might favour such a move some sections of thework force are concerned that the introduction of the companyconveyance facility may cut down their wages .the companyunder disguise of compensation allowance pays Rs.20/- permonth for traveling to employees staying more than 8 kmaway from the company premises.1. What factors would you take into account in evaluation of

this demand from the workers?2. Provide the rationale for implementing or not implementing

this demand.

Notes

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Learning Objectives To know the objectives of compensation and rewards. To learn about the Determinants of Incentives.An incentive or reward can be anything that attracts a workersattention and stimulates him to work. An incentive programmeis most frequently built on monetary rewards but may alsoinclude a variety of non-monetary rewards. The term reward hasbeen used both in the restricted sense of participation and thewidest sense of financial motivation. The concept of rewardimplies the increased wiliness or motivation to work and notthe capacity to work.Compensation and Rewards determination may have one ormore objectives, which may often be in conflict with each other.The objectives can be classified under four broad headings.

Objectives of Compensation1. The first is equity, which may take several forms. They

include income distribution through narrowing ofinequalities, increasing the wages of the lowest paidemployees, protecting real wages (purchasing power), theconcept of equal pay for work of equal value compensationmanagement strives for internal and external equity.Internalequity requires that, pay be related to the relative worth of ajob so that similar jobs get similar pay. External equitymeans paying workers what comparable workers are paid byother firms in the labor market. Even compensationdifferentials based on differences in skills or contribution areall related to the concept of equity.

2. Efficiency, which is often closely related to equity because thetwo concepts are not antithetical. Efficiency objectives arereflected in attempts to link to link a part of wages toproductivity or profit, group or individual performance,acquisition and application of skills and so on.Arrangements to achieve efficiency may be seen also as beingequitable (if they fairly reward performance) or inequitable (ifthe reward is viewed as unfair).

3. Macro economic stability through high employment levelsand low inflation, of instance, an inordinately highminimum wage would have an adverse impact on levels ofemployment, though at what level this consequence wouldoccur is a matter of debate.Though compensation and compensation policies are onlyone of the factors which impinge on macro-economicstability, they do contribute to (or impede) balanced andsustainable economic development.

4. Efficient allocation of labor in the labor market. This impliesthat employees would move to wherever they receive a netgain, such movement may be form one geographical locationto another or form on job to another (within or outside an

enterprise). The provision or availability of financialincentives causes such movement. For example, workers may move form a labor surplus orlow wage area to a high wage area. They may acquire newskills to benefit form the higher wages paid for skills. Whenan employers wages are below market rates employeeturnover increases. When it is above market rates theemployer attracts job applicants. When employees movefrom declining to growing industries, an efficient allocationof labor due to structural changes takes place.

Other Objectives of Compensation1. Acquire qualified personnel compensation needs to be

high enough to attract applicants. Pay levels must respond tothe supply and demand of workers in the labor market sinceemployers compete for workers. Premium wages aresometimes needed to attract applicants already working forothers.

2. Retain current employees- Employees may quit whencompensation levels are not competitive, resulting in higherturnover.

3. Reward desired behaviour- pay should reinforce desiredbehaviors and act as an incentive for those behaviors to occurin the future. Effective compensation plans rewardperformance, loyalty, experience, responsibility, and otherbehaviors.

Control Costs

a rational compensation system helps the organization obtainand retain workers at a reasonable cost. Without effectivecompensation management, workers could be over paid orunder paid.4. Comply with legal regulations- a sound wage and salary

system considers the legal challenges imposed by thegovernment and ensures the employers compliance.Facilitate understanding- the compensation managementsystem should be easily understood buy human resourcespecialists, operating managers and employees.

5. Further administrative efficiency- wage and salary programsshould be designed to be managed efficiently, makingoptimal use of the HRIS , although this objective should bea secondary consideration compared with other objectives.

RewardsThe use of Incentives or Rewards assumes that peoples actionsare related to their skills and ability to achieve important longer-run goals. Even though many organizations, by choice, ortradition or contract, allocate rewards on non-performancecriteria, rewards should be regarded as a payoff forperformance.

LESSON 2:OBJECTIVES OF COMPENSATION

AND REWARDS

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An Incentive Plan has The Following Important

Objectives1. An incentive plan may consist of both monetary and non-

monetary elements.2. Mixed elements can provide the diversity needed to match

the needs of individual employees.3. the timing, accuracy and frequency of incentives are the very

basis of a successful incentive plans.4. The plan requires that it should be properly communicated

to the employees to encourage individual performance,provide feedback and encourage redirection.

Determinants of IncentivesThese feature are contingencies, which affect the suitability anddesign of incentives to varying degrees. The effective use ofincentives depends on three variables-the individual, worksituation, and incentive plan.

i.(I and Ill) The Individual and the IncentivesDifferent people value things differently. Enlightened managersrealize that all people do not attach the same value to monetaryincentives, bonuses, prizes or trips. Employees view thesethings differently because of age, marital status, economic needand future objectives.However, even though employee reaction to incentives varygreatly, incentives must have some redeeming merits. Forexample, there might be a number of monetary and non-monetary incentive programmes to motivate employees.Money, gift certificates, praises, or merit pay are of thecontinuous parade of promotion.

ii.The Work SituationThis is made up of four important elements:A. Technology machine or work system, if speed of equipment

operation can be varied, it can establish range of theincentive.

b. Satisfying job assignments, a workers job may incorporate anumber of activities that he finds satisfying. Incentives maytake the form of earned time-off, greater flexibility in hoursworked, extended vacation time and other privileges that anindividual values.

Feedback, a worker needs to be able to see the connectionbetween his work and rewards. These responses provideimportant reinforcement.Equity, worker considers fairness or reasonableness as part ofthe exchange (or his work,Incentives, in general, are importantmotivators. Their effectiveness depends upon three factors:drives, preference value, and. satisfying value of the goal objects.Beyond subsistence level, becoming needs (self-actualizationneeds) possess greater preference value and are more satisfyingthan deficiency needs (which are necessary for survival). Belowthe subsistence level, however, the reverse holds true. Hemakes the following generalizations:i. Incentives, whether they are monetary or non-monetary, tend

to increase the level of motivation in a person.

ii. Financial incentives relate more effectively with basicmotivation or deficiency needs.

iii. Non-financial incentives are linked more closely with highermotivation, or becoming needs.

iv. The higher the position of a person in an organizationshierarchy, the greater is his vulnerability to non-financialincentives.

While budgetary restrictions and temporary improvements inperformance place a limit on the potency of money as amotivator, non-financial incentives involve only humaningenuity as investment and also insure a relatively stableacceleration in output.Monetary incentive imply external motivation, non-monetaryincentives involve internal motivation. Both are important. It isa judicious mix-up of the two that tends to cement incentiveswith motivation.

Assignments1. Discuss the objectives of compensation and Rewards.2. Discuss the determinants of compensation and Rewards.3. When and why would you pay a sales person a salary? A

commission? Salary and commission combined?4. Working individually or in groups, develop an incentive plan

for the following positions: chemical; engineer, plantmanager, used-car sales person. What factors n did you haveto consider in reading your conclusions

Case studyNatures Dilemma Sriram Industries is a mechanical engineering establishmentsituated in Bombay. It has 15,000 workmen employed in firstshift between 8-16 hours. This is a major shift and known asgeneral shift.The workmen of Sriram Industries report for work fromdistance places such as Pune, Virar and also Karjat, which aremiles away from the place of work. The workers travel byCentral Railway, Western Railway (Suburban Services) and byBEST buses (BEST is the local Municipal bus transportorganisation). Some also travel by petrol driven vehicles or theirown bicycle. A small number staying in surrounding areas ofthe factory, report for duty on foot.On 27 June 1990, there was a very heavy downpour, which isnot uncommon in Bombay. Vast areas were submerged underwater. Central and western sub urban railway services, therefore,were completely dislocated. As a result of the heavy rains, trainservices were suspended between 7 8 am.. BEST buses wereless frequently run and in some areas there was no bus service atall. A few timekeepers who somehow managed to attend tookattendance. It was found that out of the total complement,4000 attended in time, 2600 attended two hours late, 4800attended four hours late and the remaining 3600 did not attend.As was obvious, neither the management nor the workmen wasresponsible for the aforesaid happening and the trade union,operating in the establishment requested the management todeal sympathetically with the employees. They requested that

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Tsince it was beyond the control of workmen, even those whocould not attend should not be marked absent.The union leader had produced a certificate from Railwayauthorities and also BEST authorities about the completedislocation between 7-8.30 am and a partial dislocation till 2.30pm.As will be seen from the case, 4000 employees worked for thewhole day, 2600 worked for six hours, 4800 worked for fourhours only and 3600 did not report for duty at all. The issuewas how to adjust the wages for the day.The General Manager called a meeting of the officers to discussthe issue. It was found that a good number of officers whostayed in long distance suburbs or were staying in remote areascould not also attend to work. Some of the officers whoparticipated in the meeting, opined that no work no payshould be the only principle and at best the only thing that themanagement should do is not to take any disciplinary action assuch. Others expressed different views and there was no near-consensus even in the meeting. The General Manager adjournedthe meeting without coming to any decision.Relation between the management and the three unionsoperating in the company were generally satisfactory. Only oneof the three unions that had mainly white coloured staff asmembers had a legalistic approach in all matters and was noteasily satisfied.How can this issue be sorted out?

Notes

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Learning Objectives To understand the concept of Framework. To know the Framework of a Compensation PolicyA compensation framework that supports a long-term strategicvision for compensation and implements new initiatives, willprovide the needed direction, changes will involve movingtowards solving special salary problems using innovativeconcepts.The way we do compensation is undergoing major changetowards a more flexible and timely corporate compensationsystems. The new system will have increased delegation tomanagers and will be driven by the business needs ofGovernment and ministries. It will be faster, more efficient andeliminate duplication, focus on a long term approach tocompensation management.Move from being highly centralized to a decentralized approachwhereby deputy ministers and senior mangers will haveincreased authority to make decisions.Integrate compensation with the other areas of human resourcemanagement. And Emphasize transparency, monitoring,reporting and accountability.The vision for compensation will assist the pubic service inattracting and retaining key employees.Managers will have more accountability for the compensationof their employees, and will be profiled with the required tools,systems and support. Senior mangers will approve, within theframework, exceptional compensation changes, based on soundbusiness decisions. Senior managers will also have authority toapprove the classification levels of pre-identified jobs withintheir organization.

Framework of a Compensation PolicyEmployee motivation and performance management dependon good systems that offer both financial and non-financialrewards (non-monetary rewards). This performancemanagement article applies to all organizations.Constant change and high expectations are taking their toll insome organisations, as well as in industry and governmentgenerally. Sometimes this is shown in employee turnover.Sometimes it is hidden because of job insecurity. Manyemployees make a New Years resolution to seek otheremployment. Many are also seeking more balance in their life.Rewards and remuneration must be scrutinised. Employeemotivation and performance are critical. Non-monetary rewardscan be as important as monetary rewards.In some organisations, a multitude of different salary and payarrangements exist. It is time to bring these different systemsinto a new framework. Employees at all levels need to haveconfidence in the salary administration system. Employees want

the rewards to be shared fairly and equitably. If they are not,dissatisfaction can cause severe morale and performanceproblems.If they havent done so already, leading organisations will needto establish an improved salary administration structure.It is possible to develop a simple structure that overcomes thedifficulties of the past, yet is simple enough for everyone in theorganisation to understand. This structure can be tied to acompletely new performance management approach, includingbetter performance appraisal mechanisms.Some industrys remuneration systems have been dominated bythe industrial relations system. Enterprise bargaining and localarea work agreements, individual performance based contracts,and the effect of competition on organisational structures, havehad a big impact.A good rewards and remuneration system ensures that eachperson receives appropriate financial and nonfinancialrecognition to account for the personal contribution they aremaking and the overall value of their position to theorganisation.

This includes Creating and maintaining an organisational structure and

culture that facilitates both employee and organisationalperformance.

Recognising and rewarding individual and team performance,financially and otherwise, in relation to the overallcontribution made.

Implementing compensation systems that fairly treat andrecognise all employees,

regardless of their level within the organisation. This is theequity issue. It involves matching remuneration with thecontribution made, particularly where job requirements canchange rapidly.The best performance appraisal system in the world will notwork if it is linked to a rewards and remuneration system thatemployees do not trust or support.A motivated employee will achieve a great deal. A demotivatedemployee will be slow, prone to error and not likely to achieve.Motivation influences performance. It also suggests that thelack of , promise of, or receipt of either financial or non-financial rewards may also influence motivation. A feedbackloop between motivation and performance exists, with eachpotentially impacting the other.Remuneration is a component of both financial and non-financial reward; financially, in terms of cash and benefitsreceived; non-financially in terms of recognition, status andesteem, e.g. the status of full private use of a motor vehicle.

LESSON 3:FRAME WORK OF

COMPENSATION POLICY

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TJob evaluation is a process to determine the contribution of aposition to an organisation. It needs to be seen by both theemployee and organisation as fair and equitable.Good salary administration requires that employees shouldreceive financial recognition for the contribution that they make,and that positions of equal value should be entitled to equalcompensation. If organisations handle this incorrectly, ormanipulate it in some way, the impact on the employee issignificant.Past pay systems often paid little attention to incentives. It isonly in recent years that some systems have provided fordifferentiation based on performance. The concept of fairincentives should be on the agenda. An integrated system isrequired such as the following diagram represents.

Perception is the reality. If the current system is not working asintended, then the organisation has a real problem.

Some Key Questions Does the documentation give a full, comprehensive

description of each position? Is the evaluation system used soundly based and rigorously

applied? Is consideration given to market competitiveness in setting

the remuneration range? Is the performance appraisal system well designed and

accepted by all employees?

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Is the review process conducted fairly and within agreed timelimits? As well as checking goal achievement, does the reviewreconsider the job and changes that may have occurred?

Are non-financial rewards considered along with financialrewards?

The system should not be bureaucratic, but it has to beperceived as fair. It also has to be actually administered fairly.Where do you rate your system on a scale of 1 to 10?1. Employees are showing their total disenchantment by

leaving as quickly as they can. Morale and motivation arenon-existent.

2 Employees are unhappy and grumble frequently about thenon-existence of a remuneration system. They openly talkabout the problems instead of getting on with their work.

3. Employees are unhappy and comment frequently about theremuneration system that is supposed to be in place butdoesnt work. However, a work ethic exists and they dosome work.

4. Employees believe that management controls andmanipulates the system. They continue on regardless, butthey do not like it.

5. Employees are aware of a remuneration system but do notsee it working for them. It causes some dissatisfaction.

6. Employees believe the remuneration system only works formanagement.

7. Some employees believe the remuneration system isworking, others believe it could be better targeted to theirparticular situation.

8. A comprehensive system is in place. Position value andremuneration is fairly evaluated and most are wellcompensated. Areas for improvement are recognisingindividual and team contributions fairly. The system isreviewed regularly.

9. A comprehensive system is in place. Position value andremuneration is fairly evaluated and nearly all are wellcompensated. Individual and team contributions arerecognised. Higher achievement will come from betterimplementation.

10.Everyone from the CEO down believes that theremuneration system is working well and being equitablyadministered. Individual and team contributions arerecognized and rewarded accordingly. Although some wouldlike more pay, no one is unhappy with the system. They aremotivated and productive.

Case StudyLet us analyze the following case study regarding compensationframework:

Company BackgroundThe purpose of CalPERS policies on executive compensationis to raise the level of accountability of Boards andCompensation Committees to shareowners. CalPERS feels itwill benefit shareowners in the long-term if shareowners canprovide an enhanced level of oversight in relation toCompensation Committee actions. This results in more

shareowner friendly compensation programs.Compensation programs are one of the most powerful toolsavailable to companies to attract, retain and motivate keyemployees, as well as align their interests with those ofshareowners. Poorly designed compensation packages may havedisastrous impacts on the company and its shareowners byincentivising short-term oriented and self -interested behavior.Conversely, well-designed compensation packages may helpalign management with owners and drive long-term superiorperformance. Since equity owners have a strong interest in long-term performance and are the party whose interests are dilutedby stock option plans, CalPERS believes shareowners shouldprovide stronger oversight of executive compensationprograms.In recognition of this, CalPERS believes that companiesshould formulate executive compensation policies and seekshareowner approval for those policies on a periodic basis. SinceSECs Release #34-48108, adopted on June 30, 2003 as listingstandards, for the NYSE and NASDAQ, companies must giveshareowners the opportunity to vote on all equitycompensation plans and material revisions (with limitedexemptions). The ability to vote on these plans provides thechecks and balances on the potential dilution resulting fromearmarking shares for equity-based awards.With this in mind companies should design executivecompensation policies to be comprehensive enough to provideshareowners with oversight of how the company will designand implement compensation programs, yet broad enough topermit the Compensation Committee flexibility inimplementing the policy. CalPERS does not believe that it isoptimal for shareowners to approve individual contracts at thecompany specific level.CalPERS developed a model policy guideline designed to assistcompanies in formulating executive compensation policies. Thisalso provides a framework by which interested parties maygauge the quality of company specific executive compensationprograms and practices.

General Policy GuidelinesThis also provides a framework by which interested parties maygauge the quality of company specific executive compensationprograms and practices.

General Policy GuidelinesExecutive compensation programs should be designed andimplemented to ensure alignment of interest of managementwith the long-term interest of shareowners.Executive compensation should be comprised of acombination of cash and equity-based compensation. Directownership should be strongly encouraged.Executive compensation policies should be transparent toshareowners. The policies should contain, at a minimum,compensation philosophy, the targeted mix of basecompensation and at risk compensation, key methodologiesto ensure alignment of interest, and parameters for guidance ofemployment contract provisions, including severance packages.

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TCompanies under new SEC guidelines must provideshareowners the opportunity to vote on any material revisionsto these plans.Executive contracts should be fully disclosed, with adequateinformation to judge the drivers of incentive components ofcompensation packages.

Executive Compensation PoliciesIn particular, executive compensation policies should contain, ata minimum, the following components:1. The companys desired mix of base, bonus and long-term

incentive compensation This section should include adequatedetail to shareowners regarding the companys philosophyof base pay components versus pay at risk components ofthe program. Details should include reasonable ranges basedon total compensation within which the company will targetbase salary as well as other components of totalcompensation. Overall targets of total compensation shouldalso be provided.This section should also provide an overview of how thecompany intends to structure the compensation program,such as how much of overall compensation is based on peerrelative analysis and how much of it is based on othercriteria. The policy should clearly articulate how the companyensures optimal alignment of interests with shareownersthrough the design and implementation of its executivecompensation program.

2. The companys intended forms of incentive and bonuscompensation, including what types of measures will beused to drive incentive compensation.In addition to the relative mix of base salary and any formof incentive compensation, the company should provide abreakdown of the types of incentive compensation andreasonable ranges based on total compensation targets foreach type of incentive compensation within the program.The policy should include the companys philosophy relatedto the major components of incentive compensation,including the strengths and weaknesses of each and how theoverall incentive component of the plan provides optimalalignment of interests with shareowners.CalPERS believes that in the case of option plans andrestricted stock, a significant portion of the overall programshould consist of performance-based plans. These includeindex-based options, premium-priced options andperformance targets tied to company- specific metrics.Performance-based plans should be constructed to rewardtrue out-performance, and should include provisions bywhich options will not vest if hurdles are not obtained.Time-accelerated vesting is not considered a meaningfulperformance-based hurdle.The policy should include the specific drivers the companywill use in constructing the performance-based componentsof the plan. CalPERS suggests using metrics such as Returnon Invested Capital (ROIC), Return on Assets (ROA), andReturn on Equity (ROE), and the relative mix of howperformance metrics will be weighted.

CalPERS believes that optimal plan design will utilizemultiple performance metrics in a fashion that will tie smallportions of vesting to individual metrics or larger portionsof vesting to multiple metrics.CalPERS believes that if metrics are used in combination,the plan should require that each component be satisfied toachieve vesting as opposed to one of several that must beachieved.

3. The companys intended distribution of equity-basedcompensation.The policy should include the companysphilosophy related to how equity-based compensation willbe distributed within various levels of the company.In the event that the company uses equity-based tools in itscompensation program, the policy should articulate how thecompany will address the issue of dilution. For example, thecompany should provide a detailed plan with each optionprogram addressing the intended life of the plan and theyearly run rate.If the company intends to repurchase equity in response tothe issue of dilution, the plan should clearly articulate howthe repurchase decision is made in relation to other capitalallocation alternatives. Calipers does not favorably viewrepurchase plans that are

4. The companys philosophy relating to the dilution ofexisting equity owners simply targeted to mitigate andobfuscate dilution caused by stock option plans.

5. The parameters by which the company will use severancepackages, if at all.

6. The parameters by which the company will utilize otherforms of compensation, if at all.The policy should provide broad guidelines by which thecompany will use alternative forms of compensation, andthe relative weight in relation to overall compensation ifother forms of compensation will be utilized.

The term and length for other forms of compensationshould be disclosed. Other forms of compensation include butare not limited to pension benefits, deferred pay, perquisites andloans. In some cases, other forms of compensation can providesignificant value to executives, which are not readily comparableto more basic forms of compensation such as salary, bonus andincentive.Other forms of compensation are also more likely to beperceived by shareowners as not providing meaningfulalignment of interests or incentive value. To the degree that thecompany will provide other forms of compensation, it shouldclearly articulate its philosophy for utilizing these tools withspecific treatment of how shareowners should expect to realizevalue from including these forms of compensationExecutive compensation programs should be designed andimplemented to ensure alignment of interest of managementwith the long-term interest of shareowners. Executivecompensation should be comprised of a combination of cashand equity-based compensation. Direct ownership should bestrongly encouraged.

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Executive compensation policies should be transparent toshareowners. The policies should contain, at a minimum,compensation philosophy, the targeted mix of basecompensation and at risk compensation, key methodologiesto ensure alignment of interest, and parameters for guidance ofemployment contract provisions, including severance packages.Companies under new SEC guidelines must provideshareowners the opportunity to vote on any material revisionsto these plans.Executive contracts should be fully disclosed, with adequateinformation to judge the drivers of incentive components ofcompensation packages.In addition to the relative mix of base salary and any form ofincentive compensation, the company should provide abreakdown of the types of incentive compensation andreasonable ranges based on total compensation targets for eachtype of incentive compensation within the program.The policy should include the companys philosophy related tothe major components of incentive compensation, includingthe strengths and weaknesses of each and how the overallincentive component of the plan provides optimal alignmentof interests with shareowners.Calipers believe that in the case of option plans and restrictedstock, a significant portion of the overall program shouldconsist of performance-based plans. These include index-basedoptions, premium-priced options and performance targets tiedto company-specific metrics.Performance-based plans should be constructed to reward trueout-performance, and should include provisions by whichoptions will not vest if hurdles are not obtained. Time-accelerated vesting is not considered a meaningfulperformance-based hurdle.The policy should include the specific drivers the company willuse in constructing the performance-based components of theplan. Calipers suggests using metrics such as Return onInvested Capital (ROIC), Return on Assets (ROA), and Returnon Equity (ROE), and the relative mix of how performancemetrics will be weighted. Calipers believes that optimal plandesign will utilize multiple performance metrics in a fashionthat will tie small portions of vesting to individual metrics orlarger portions of vesting to multiple metrics.Calipers believes that if metrics are used in combination, theplan should require that each component be satisfied to achievevesting as opposed to one of several that must be achieved.

Answer the questions below based on the above

case study What is the purpose behind Calipers policies on executive

compensation? Based on the above case study how can you say that

compensation programs are one of the most powerful toolsavailable to companies?

Discuss the components of executive compensation.

Notes

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Learning Objectives To know the Labour Market To understand Labour Market Characteristics To know Labour and Labour WelfareSo students what do you understand by a labour market.Labor Market is a place where labour is exchanged for wages. These places are identified and defined by a combination of thefollowing factors: 1. Geography (local, regional, national, international),2. Industry,3. Education, licensing or certification and4. Function or occupation.Labour market characteristics are also social matters.Sociological and demographic change; social class movements,gender awareness, youth cultures, attitudes to age, family sizeand employment heritage, ethic and cultural background - mayall influence who enters, leaves or is restricted from taking upand keeping particular kinds of employment.These are relevant to labour markets. Overall we should beconcerned to understand structures and processes influencing how work is distributed

in the defined labour market. how pay is distributed and pay levels and relativities between

various jobs and groups how patterns of work are changing and the level, structure

and distribution of employmentThe economic labour market modelSupply, demand and pricing concepts can be applied to labourmarket operations. Typically this paradigm assumes that wagesregulate supply/demand for labour affecting inflation andemployment within an economy. But there is no single,homogeneous and perfect market for labour. Rather there aremany differentiated, interrelated markets based on skill,occupation, geographical location and institutional/socialframeworks.

Assumptions of the model include deriving income expectations from the persons utility

function. The supply of labour (how many offeringthemselves for work and for how long is determined bywages that are offered).

Work as a disutilitywith wages being the reward/compensation for lost leisure and subordination under acontract to an employer. Sometimes - overtime premiums arepaid - but why in only some cases?

Wages are a cost and for employers wanting to maximiseprofits labours marginal productivity value is significant.

With fixed level of capital , at some point the output of eachextra unit of labour will start to fall off , so as the argumentgoes - the wage paid will be equal to the value of themarginal productivity of the last unit of labour. Supply anddemand for labour (quantitatively and qualitatively) operatecompetitively through wages (pricing). At an equilibriumpointeveryone willing to work at that wage.In reality, assumptions about free labour markets wheresupply, demand, price and individuals/firms interplay andcompete to maximise their position - are too simple.Individuals and employers make choices within their labourmarkets. Results may be interrelated and interdependent butthe choices are constrained by many social and other factors including labour market institutionalisation. Formal andinformal rules, regulations and practice prevail over themarginal productivity of labour formula. Salamon pointsout that the free market wages may be constrained by:

Reservation wage LevelsUnemployment benefit and a national minimum wage fixincome points below which few will be prepared to work.

Efficiency wage LevelsThere is little evidence that organisations generally use a lowestwage mechanism as a regulator - indeed some may adopt a highwage strategy. A range of pay rates for a given labour market willapply rather than one price. Employers, in one way or another,survey prevailing rates for the type of work they have and thescarcity values they perceive. To secure the staff commitment,effort and talent they need, they may pay above what they regardas the going rateor minimum level.Company wage and salary surveys may identify the firmsposition relative to similar jobs/rewards in rival organisations.To attract and retain the best employees an employer (financeand competitive health permitting) may make a decision to behigh in the survey league table. Of course, if the companysfinancial and competitive position deteriorates, it is moredifficult (institutional reasons) to reduce contracted pay otherthan by regulating overtime. Off-loading staff by makingredundancies has costs.Production needs (derived from technology and workingmethods) may be a more significant determinant of thenumbers to be employed than the wage level at any given time.A political perspectiveSuch dynamics require a political economic perspective whenstudying labour markets. Some national or regional labourmarkets may be dominated by power groups e.g.Socially oriented political parties Large groups of workers that can bring bargaining power to

bear Companies that can switch production and close factories/

offices

LESSON 4:LABOR MARKET

CHARACTERISTICS

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Some labour markets are perceived to be freer and less regulatedthan others. Such perceptions may influence the flows ofinward investment - thus bringing new jobs into the labourmarket. But note the word perception. Detailed analysis onlywill discern how far one national labour market is really freerthan another.Labour markets are substantially affected by growth or recessionin world trade. Industrial restructuring e.g. from heavy, maledominated industries to lighter, information-based and serviceto customers oriented industries where women for variousreasons are about to compete better. Changes in technologysubstantially affect jobs. Some disappear. Employers may needfewer staff and the skills required of computer literateemployees take on greater significance. Those who are notcomputer literate may indeed be excluded from a significant areaof employment growth.

Collective BargainingWhere trade unions are established, within an employingorganisation and/or a wider institutional framework, collectivebargaining processes may determine wage structures for aclassof employees. Management become less able to treatlabour as individual, replaceable units. Collectively negotiatedand regulated wage structures may also apply to the individualwho, whilst entering into an employment contract as anindividual and indeed not necessarily a trade union member,becomes subject to the terms and conditions of employmentagreed between an employer and a trade union for that class ofemployees e.g. railway workers.

Some Labour Market RelationshipsCollective negotiation will typically involve comparability withother groups (internal and external) not just supply anddemand factors. Comparability may lead to one group throughtheir trade union or word of mouth or the media to argue e.g.

nurses were awarded 7.5%, teachers now deserve at least this intheir next pay award - and more because of past slippage againstinflation. There is a ratchet effect - always upward from suchpay comparability arguments. Dual (external and internal)labour markets Hiring and firing are interactions betweenorganisations, individuals and the external labour market. Thereare internal labour market effects also.Employers with a large work forces and organisation structureshave internal labour markets characterised by rules governing points of entry into jobs, required

qualifications and starting salaries salary structures and job evaluation internal mechanisms for enabling progression various modes of training provision

Labour Theory of ValueThe notion that the value of any good or service depends onhow much labour it uses up. First suggested by ADAMSMITH, it took a central place in the philosophy of KARLMARX. Some neoclassical economists disagreed with thistheory, arguing that the price of something was independent ofhow much labor went into producing it and was insteaddetermined solely by supply and demandA flexible labour market is one in which it is easy andinexpensive for firms to vary the amount of labor they use,including by changing the hours worked by each employee andby changing the number of employees.This often means minimal regulation of the employment (nominimum wage, say) and weak (or no) trade unions. Suchflexibility is characterized by its opponents as giving firms all thepower, allowing them to fire employees at a moments noticeand leaving working feeling insecure.Opponents of labor market flexibility claim that labor laws thatmake workers feel more secure encourage employees to invest inacquiring skills that enable them to do their current job betterbut that could not be taken with them to another firm if theywere let go.Supporters claim that it improves economic efficiency by leavingit to market forces to decide the terms of employment. Broadlyspeaking, the evidence is that greater flexibility is associated withlower rates of unemployment and higher GDP per head.

Labour Market CharacteristicsLabor, one of the factors of production, with land, capital andenterprise. Among the things that determine the supply oflabor are the number of able people in the population, theirwilling ness to work, labor laws and regulations, and the healthof the economy and firms, labor laws and regulations, as well asthe price and supply of other factors of production.In a perfect market, wages (the price of labor) would bedetermined by supply and demand, but the labor market isoften far perfect. Wages can be less flexible than other prices inparticular, they rarely fall even when demand for labor declinesor supply increases. This wage rigidity can be a cause ofunemployment.

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TLabour and Labour WelfareLabour sector addresses multi-dimensional socio-economicaspects affecting labour welfare, productivity, living standards oflabour force and social security. To raise living standards of thework force and achieve higher productivity, skill upgradationthrough suitable training is of utmost importance. Manpowerdevelopment to provide adequate labour force of appropriateskills and quality to different sectors is essential for rapidsocioeconomic development. Employment generation in all theproductive sectors is one of the basic objectives.In this context, efforts are being made for providing theenvironment for self-employment both in urban and ruralareas. During the Ninth Plan period, elimination of undesirablepractices such as child labour, bonded labour, and aspects suchas ensuring workers safety and social security, looking afterlabour welfare and providing of the necessary support measuresfor sorting out problems relating to employment of both menand women workers in different sectors has received priorityattention.

Central SectorVarious plan schemes of the Ministry of Labour aim atachievement of welfare and social security of the working classand maintenance of industrial peace. As against the approvedoutlay of Rs.130 crore for the year 1999-2000, the anticipatedexpenditure would be Rs.104 crore. The approved outlay for theyear 2000-2001 is Rs.123 crore. (Refer Annexure 5.7.1 for CentralSector and Annexure 5.7.2 for State sector).Plan initiatives in the Labour & Labour Welfare Sector are asunder:i. Training for skill development.ii. Services to job seekers.iii. Welfare of labour.iv. Administration of labour regulations.4. Under the Constitution of India, Vocational Training is a

concurrent subject. Thedevelopment of training schemes at National level, evolutionof policy, laying of training standards, procedures, conductingof examinations, certification, etc. are the responsibility of theCentral Government, where as the implementation of thetraining schemes largely rests with the State/U.T. governments.The Central Government is advised by the National Council ofVocational Training (NCVT), a tripartite body which hasrepresentation from employers, workers and Central/Stategovernments. At the State level, similar councils known as StateCouncils for Vocational Training are constituted for the samepurpose by the respective state governments at state levels.The main objectives of the scheme are as under:i. To ensure steady flow of skilled workers.ii. To raise the quality and quantity of industrial production by

systematic training of potential workers.iii. To reduce unemployment among educated youth by

equipping them with suitable skills for industrialemployment.

ExerciseSelect a country e.g. Brazil, Greece, India, Japan, Georgia, Ghana,Germany-and evaluate national attitudes to women at work particularly mothers holidays and the work/leisure mix retirement ages and how age and seniority are significant

factors nepotism, the old boys network or tribe - employing from

within the family or circle of friends. are employee contracts readily terminated if their

performance is inadequate?does the employer take a long term social responsibilityline inretaining staff in a trading down-turn or does the employerresort to a short term hire and fire policy?

Notes

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Learning Objectives To further understand the concept of Compensation and

Reward To understand Methods of Compensation To know the concept of Wage Level and Wage Rate To understand the concept of Wage Structure To know the Determinants of the wage structureIt is extremely important to have a well-designed compensationsystem. A properly planned and administered salary system isone of the most important aspects of order management.Deciding how and what people should be paid is what iscovered under salary administration.In this unit we shall pay special attention to the process offeringsalary levels, and designing salary structures. More dynamicaspects such as rate ranges, salary progression policies andprocedures will also be examined.

Compensation and RewardsCompensation may be defined as money received in theperformance of work, plus the many kinds of benefits andservices that organizations provide their employees.Money is included under direct compensation (popularlyknown as wages, i.e., gross pay); while benefits come underindirect compensation, and may consist of life, accident, andhealth insurance, the employers contribution to retirement, payfor vacation or illness, and employers required payments foremployee welfare as social security.A wage (or pay) is the remuneration paid, for the service oflabour in production, periodically to an employee/worker.Wages usually refer to the hourly rate or daily rate paid to suchgroups as production and maintenance employees (blue-collarworkers).On the other hand, Salary normally refers to the weekly ormonthly rates paid to clerical, administrative and professionalemployees (white-collar workers).

Methods of CompensationThe operating companies need to develop a compensationpackage for their employees depending on the size and type ofbusiness, employers may choose to compensate their employeesin a number of different ways.Below is given the different methods of compensation:

1. Wages and SalariesAlthough we use the terms wages and salaries interchangeably,in payroll accounting, the two terms have different definitionsWages refers to the earnings of employees whose pay iscalculated on an hourly basis.

Salary refers to the earnings of employees whose pay iscalculated on a weekly, bi-weekly, semi-monthly, or monthlybasis.

2.CommissionsSales commission plans vary greatly from company to company,but are generally based on the dollar amount of sales madeduring a payroll period. Commission income is considered thesame as wages or salaries for withholding and reportingpurposes. Commissions are usually computed on a certainpercentage or commission rate.Some commissioned employees may not be exempt from theminimum wage requirement. The employer must determine theregular, hourly rate for each non-exempt salesperson during theweek and make sure this rate is at least equal to the currentminimum wage.

3.Piece-Rate PlanWorkers paid on a piece-rate plan receive a certain amount foreach item produced. Gross earnings equal the rate per itemmultiplied by the number of items produced during the payrollperiod

4.Combination PlanMany businesses pay sales people both a salary and acommission. Such a combination plan provides some regularincome and offers an incentive for superior sales.

5.DrawsDraws are often given to salespeople who work only forcommission. A draw is an advance given to a salesperson thatwill be collected when future sales transactions are closed. Drawswill be subtracted from a salespersons commissions after anyapplicable taxes and deductions have been withheld. The drawis subject to all payroll withholding taxes.

Other Types of Earnings

6.BonusesBusinesses offer bonuses in many different ways. Somebonuses are based on profitable operations of the business andare paid at year-end. A common type of bonus may be offeredto salespeople for selling a specific item. Another type of bonusplan, one that may be part of an employment agreement, paysmanagers if the yearly sales or profits reach a certain level.

7.Profit Sharing PaymentsA profit sharing plan, like a bonus plan, can be structured in anumber of different ways. An employer may elect to pay cash toemployees, give them stock in the business, or set up a deferredcompensation fund for retirement.

8. Other Taxable Forms of CompensationSometimes other payments to employees are required that areequivalent to wages. These include non-cash fringe benefits,reimbursed expenses, sick pay, supplemental unemployment

UNIT-2ESSENTIAL ELEMENTS

OF COMPENSATIONLESSON 5:COMPENSATION STRUCTURE AND

DIFFERENTIALS

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Tbenefits, and tips. As with any form of compensation, thesepayments are subject to federal taxes.

9.Non-Cash Fringe BenefitsNon-cash fringe benefits must be included in an employeesgross earnings.Fringe benefits include the following: Personal use of company cars Free or discounted airline flights Vacations Discounts on property or services Memberships in country clubs or other social clubs Tickets to entertainment or sporting events

10.Reimbursed ExpensesPayments made to employees for travel and other necessarybusiness expenses are taxable only if:The employee does not have to substantiate those expenseswith receipts or other documentation. The employer advancesan amount to the employee for business expenses and theemployee does not return any unused amount.Travel and entertainment reimbursements, or other expenseallowances, paid to an employee under a non-accountable planare also included as wages. Under a non-accountable plan, theemployee is given a certain amount of money toward expenses,but does not have to substantiate them or return any excesscash.Under an accountable plan, travel advances paid to the employeeprior to travel in excess of substantiated expenses must berepaid to the employer within a reasonable and specified periodof time.

11.Sick PayIn general, sick pay is any amount paid to an employeebecause of illness or injury under a plan providing forsuch benefits. The amounts are disbursed by the insurancecompany or the employees trust, and are referenced asthird party payments.12.TipsIn certain businesses, employees receive compensation in theform of gratuities or tips. A tip is an additional amount from acustomer for services rendered. Bartenders and restaurantservers usually receive tips in addition to wages. Hair stylists andtaxi drivers also depend on tips as a major source of income.

13.Supplemental WagesSupplemental wages differ from regular wages only in that theymay be based on a different payroll period, computed on adifferent compensation plan or rate, or paid at a different timethan regular wages.In addition, certain payments are, by their nature or timing,supplemental wages. Such payments include retroactive payincreases, severance pay, bonuses, commissions, taxable fringebenefits, awards and vacation pay on termination.

The distinction between regular and supplemental wages isimportant because special rules apply to withholding onsupplemental wages.

14.Exempt Payments:Compensation not considered wages includes sickness andinjury payments under a workers compensation law, and otherpayments that are likely to be tax deductible such as qualifiedmoving expense reimbursements.

Wage levelWe have already discussed before that wages are somethingreceived by a worker or paid by an employer for time on the job;money received or paid usually for work by the hour, day, orweek, or month; a calculation or statement of money earned fora period of time from one hour (hourly wage) up to one year(annual wages). Now let us discuss about wage level.

What is a Wage Level?The wage levels represent the money an average worker makesin a geographic area or in his organization. It is only an average;specific markets or firms and individual wages can vary widelyfrom the average.

How are Wage Levels are Set?Wage levels are calculated using position importance and skillrequired as criteria. Consult your trade association andaccountant to learn the most current practices, cost ratios andprofit margins in your business field. While there is a minimumwage set by federal law for most jobs, the actual wage paid isentirely between you and your prospective employee.

What is Stagnated Wage Levels?An add to Housing Woes of Poor. The continuing stagnationof the income levels for the most disadvantaged...The continuing stagnation of the income levels for the mostdisadvantaged households is causing serious housing challengesfor people in the lowest 20 percent of the income scale. This isone of the findings of The State of the Nations Housing2002, issued by the Joint Center for Housing Studies atHarvard University.Furthermore, the current high home prices, while good forsellers, work against the lowest income households, driving upboth purchase prices and rents for twenty million families. Although the plight of renters receives much attention, thevast majority of lowest income owners also face severe housingaffordability problems, said the report. Overall, some 8.6million renters and 6.4 million owners in this group pay morethan 30 percent of their limited incomes for housing and/orlive in structurally inadequate or overcrowded homes.The 2002 report, based on 2000 census data, indicates a largedisparity between even middle-income and high-incomehouseholds. The top category has shot up from slightly below$100,000 in 1975 to just under $150,000 in 2001, while thelowest income has stayed constant at below $20,000. Incomes atthe $50,000 level in 1975 have increased but lag far behind theactual dollar and percentage increases of the highest level.

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The report shows that the lowest income households are white,own their own homes, and are either employed or retired. A growth in the overall percentage of homeownershipsomewhat offsets the negative figures. Home ownershipcontinues to increase, especially among minority groups.Minorities accounted for 40 percent of the net new ownersduring the last five years, the report states. A large part of thismay be accounted for by the increase of homeowners amongimmigrant populations.An expanding market for low-income borrowers has resulted ina dual mortgage market, according to the Harvard report.Higher income borrowers continue to use conventionalmortgages keyed to the prime interest rate. Low-incomeborrowers turn more toward government-backed and subprimemortgages and to manufactured homes. Sub prime rates can be higher than conventional mortgages andoften expose borrowers to greater risks.

What is a Wage Rate?A wage is an amount of money paid to a worker for somespecified quantity of labor. When expressed with respect totime, it is typically called the wage rate.The wage rate is the pre-tax amount of payment, usuallymonetary, paid per unit of labor. It is the main monetary itemthat the worker and the employer focus on.

Definition and Concept of CompensationStructureAs it has been discussed in the earlier chapters thatcompensation is the act of compensating or the state of beingcompensated or something, such as money, given or received aspayment or reparation, as for a service or loss.

What is Compensation Structure?A Histogram of what people earn.Although money isnteverything, it certainly is one of the top issues potentialemployees look at when interviewing new companies. (Yes, faceit, they are interviewing YOU.) Whether youre offering astraight basic salary structure or an incentive-based pay structuremay make or break you in the eyes of top job candidates.Compensation structure consists of the various salary gradesand their different levels of single jobs or groups of jobs.The term wage structure is used to describe wage/salaryrelationships within a particular grouping. The grouping can beaccording to occupation, or organization, such as wage structureof craftsman (carpenters, mechanics, bricklayers, etc.)The wage structure or grade is comprised of jobs ofapproximately equal difficulty or importance as determined byjob evaluation. If the point method of job evaluation is used,the pay-grade consists .of jobs falling within a range of points.If the factor comparison plan is used, the grade consists of arange of evaluated wage rates (or points, if the wage rates areconverted to points). If the ranking plan is used, the gradeconsists of a specific number of ranks. If classification systemis used, the jobs are already categorized into class or grades.

So the term Compensation structure means the pattern or thebreak up of the salary paid to the employees in their respectiveorganization.Please remember that while determining the compensationstructure of employees, it is not only the mathematics but othersubjects such as biology and psychology play a major role incompensation determination.Biology, the increase in size or activity of one part of anorganism or organ that makes up for the loss or dysfunction ofanother. Psychology, behavior that develops either consciouslyor unconsciously to offset a real or imagined deficiency, as inpersonality or physical ability.Hence we can realize that compensation management is anintegral part of the labor market characteristics in order to attractcapable employees by respective organizations.

Determinants of the wage structureBefore discussing the wage determination process in detail let usfirst discuss the determinants of wage structure.

1.Economic DeterminantsIn the labor market there commonly exists, known asOccupational Wage Differentials.The reason for its existence is that in different occupationsrequire different qualifications, different wages of skill and carrydifferent degrees of responsibility, wages are usually fixed onthe basis of the differences in occupations and various degreesof skills.Adam Smith explains occupational wage differentials in termsof :1. Hardship,2. Difficulty of learning the job,3. Stability of employment,4. Responsibility of the job, and5. Chance for success or failure in the work. This is a theory of

wage structure. But his standards of worth are equally usefulin explaining the complexity of wage structure decisions. Themarket value of an item is the price it brings in a marketwhere demand and supply are equal. Use value is the value anindividual buyer or seller anticipates through use of the item.Use value obviously varies among individuals and over time.

2.Job worthThese two concepts of worth and the concept of internal labormarkets combine to explain important differences amongemployers in wage structure decisions.Organizations with relatively open internal labor Markets(organizations in which most jobs are filled from outside) makemuch use of market value. They also make much use of wageand salary surveys in wage structure decisions.Conversely, organizations with relatively closed internal labormarkets (most jobs are filled from inside) emphasize use value.Their analysis of job worth relies more heavily on perceptionsof organization members of the relative value of jobs.

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Some other wage structure determinants derived fromeconomic analysis may be noted. Training requirements of jobsin terms of length, difficulty, and whether the training isprovided by society, employers, or individuals constitute aprimary factor in human-capital analysis and thus job worth.The interaction of ability requirements with trainingrequirements can yield different job values depending on thescarcity of the ability required and the number of people whotry to make it in the occupation and fail.

4.Employee TastesEmployee tastes and preferences are another economic factor.People differ in the occupations they like and dislike. In likemanner, occupations have non-monetary advantages anddisadvantages of many kinds.

Case StudyTwo Tier Pay StructureIN 1976, the Indian subsidiary of a multinational refinerybecame a government of India Company.The government company had announced an ambitiousexpansion program, which meant doubling the work force inless than four years in 1977 at the time of wage revision , theunion and management agreed to a two tier structure. Thosealready employed will be eligible for a higher grade and thosewho are recruited fresh will get a lower grade though jobs aresimilar in skill , responsibility and effort . Both the union andthe management justified that this is an innovative practicewidely followed in deregulated companies abroad ,particularly the airlines in north AmericaAnswer the following Questions: Is it a fair agreement? Would it contravene with the concept of equal pay for equal

work?

Notes

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Learning Objectives To understand the Wage Determination Process To know the Concept of Wage Surveys To understand the Preparation of a Wage Structure

What is the Wage DeterminationProcess?Determination of an equitable wage and salary structure is oneof the most important phases of employer-employee relations.For good industrial relations, each employee should1. Receive sufficient wages and salaries to sustain himself and

his dependents.2. Feel satisfied with a relationship between his wages and

wages of other people performing the same type of work insome other organization.

The primary objective of wage and salary administrationprogram is that each employee should be equitablycompensated for the services rendered by him to the enterpriseon the basis of The nature of the job. The present worth of that type of job. The effectiveness with which the individual performs the job.Usually, the steps involved in determining wage rates are:performing job analysis, wage surveys, analysis of relevantorganizational problems forming wage structure, framing rulesof wage administration, explaining these to employees,assigning grades and price to each job and paying the guaranteedwage.

Fig.1 Steps Involved in Determination of Wage Rate

The Process of Job AnalysisResults in job descriptions which lead to job specifications. Ajob analysis describes the duties, responsibilities, working

conditions and inter-relationships between the job as it is andthe other jobs with which it is associated.It attempts to, record and analyze details concerning thetraining, skills, required efforts, qualif