ASSIGNMENT
Topic: COMPENSATION MANAGEMENT
Submitted by
Athul Philip
MBA17019
(2nd Semester)
Submitted on
25/07/2018
Submitted to
Prof. Gibby
WHAT IS COMPENSATION MANAGEMENT?
In simple terms if we say, Employees get paid for the work they do, and
companies have a process or procedure they use when deciding the terms of the
compensation. Thus, compensation management is the act of distributing some
type of monetary value to an employee for their work by means of the company's
policy or procedures. In basic terms, it is paying an employee based upon the
decided pay and benefit package for the position. The goal of compensation
management is to find quality people who perform quality work and then
compensate them in order to retain them and reduce turnover rates. Some
different types of compensation include salary, overtime pay, commission,
bonuses, and benefits packages that might include health and dental insurance,
vacation time, and retirement savings. Salary and wages important aspects in
developing and maintaining good employer- employee relationship.
Compensation management aims at optimizing cost of compensation by
establishing some kind of linkage with performance and compensation. It is not
necessary that higher level of wages and salaries will bring higher performance
automatically but depends on the kind of linkage that is established between
performance and wages and salaries. Compensation management tries to attempt
at this.
OBJECTIVES OF COMPENSATION MANAGEMENT
The basic objective of the compensation management can be briefly
termed as meeting the needs of both employees and the organisation. Since both
these needs emerge from different sources, often, there is a conflict between the
two. This conflict can be understood by agency theory which
explains relationship between employees and employers. The theory suggests
that employers and employees are two main stakeholders in a business unit, the
former assuming the role of principals and the latter assuming the role of agents.
The compensation paid to employees is agency consideration. Each party to
agency tries to fix this consideration in its own favour. The employers want to
pay as little as possible to keep their costs low. Employees want to get as high as
possible. The compensation management tries to strike a balance between these
two with following specific objectives:
The compensation should be paid to each employee on the basis of their
abilities and training.
Compensation should be in the form of package.
It should motivate the employees towards increasing productivity.
It should be capable of taking care of employees for safety and security
needs also.
It should be flexible and clear.
It should not be excessive.
Compensation should be decided by the management as per the norms
fixed by the legislations in consultation with the union.
To maximize RETURN ON INVESTMENT (ROI)
To retain and reward personnel.
To Optimize the Cost of Compensation
COMPONENTS OF COMPENSATION MANAGEMENT
Components of Compensation of Employees can be classified into:
1. Base or primary Compensation
Wages
Salaries
2. Supplementary Compensation
Dearness allowances
Bonus
The basic components of employee compensation and benefits:
1. Guaranteed pay: It is a fixed monetary (cash) reward paid by an employer to
an employee. The most common form of guaranteed pay is base salary.
Guaranteed pay also includes cash allowances (housing allowance, transport
allowance, etc.), differentials (shift differentials, holiday differentials) and
premiums (overtime, night shift, etc.)
2. Variable pay : It is a non-fixed monetary (cash) reward paid by an employer
to an employee that is contingent on discretion, performance, or results achieved.
The most common forms of variable pay are bonuses and incentives.
3. Benefits :programs an employer uses to supplement employees’
compensation, such as paid time off, medical insurance, company car, and more.
4. Equity-based compensation – stock or pseudo stock programs an employer
uses to provide actual or perceived ownership in the company which ties an
employee's compensation to the long-term success of the company. The most
common examples are stock options.