Employee Compensation
Everything you need to know about the employee compensation.
Compensation or Remuneration is a systematic approach to provide
monetary value to employees in exchange for work performed by
them is called as compensation or remuneration.
Compensation may achieve several purposes assisting in
recruitment, job performance and job satisfaction.
Employee Compensation – Definitions: Suggested by
R. Wayne Mondy, Gary Dessler, Terry Leap and Cascio
Compensation or Remuneration is a systematic approach to provide
monetary value to employees in exchange for work performed by them
is called as compensation or remuneration. Compensation may
achieve several purposes assisting in recruitment, job performance
and job satisfaction.
In the case of Human Resource Management, compensation is
referred to as money and other benefits that are received by an
employee for providing services to his employer.
Money and benefits received may be in different forms — based
compensation in money or monetary form and various benefits, these
may be associated with employee’s service to the employer like
provident fund, gratuity and insurance scheme and any other payment
which the employee receives or benefits he enjoys in lieu of such
payment.
R. Wayne Mondy defines compensation as, “Compensation is the total
of all rewards provided to employees in return for their services. The
overall purposes of granting compensation are to attract, retain and
motivate employees.”
Gary Dessler opines, “Compensation means all forms of pay or
rewards going to employees and arising from their employment.”
Terry Leap opines, “Compensation is a broad term pertaining to
financial rewards received by persons through their employment
relationship with an organisation.”
Cascio states, “Compensation includes direct cash payments indirect
payments in the form of employee benefits and incentives to motivate
employee to strive for higher levels of productivity.”
Employee Compensation – Meaning and Concept
Compensation is one of the most important parts of an employment
contract that brings in people from outside and makes them members
of an organization. The pull effect of an organization’s compensation
system, however, varies from industry to industry and from position to
position within the industry.
Industries that are in a state of flux experiencing rapid change in
technology of operation and fast change in business practices may find
their employees very sensitive to compensation practices of other
organizations. In contrast industries that are relatively stable both in
terms of the way business processes are conducted and in terms of the
way organizations compete with each other, have employees who may
not show much sensitivity to difference in compensation with
employees working in other organizations.
Example- Employees working in IT and IT enabled service industries,
and to some extent the banking industries show such behaviour of
high concern and sensitivity to compensations rates of their employer.
Similarly, young and fresh college graduate employees of companies
show higher sensitivity to compensation practices of their employers
than their senior managerial executives.
All in all it can be safely said that among the many policies and
practices that influence a prospective employee’s choice of employer,
compensation policies and practices rank well above many other areas
of HR practices.
In conventional management practice, most organizations pay their
employees according to certain historical rates which may have been
set well in the past and are adjusted based on the changing cost of
living due to inflationary pressure. Ideally an employee should be paid
what his or her works and services are worth in the company. But this
evaluation of actual worth of an employee service is fraught with a
number of complexities.
Firstly, to know the actual service value an employee can rarely trade
his/her services in the open market. Most employees’ services are
traded in an internal market of the employer. Majority of the
industrial organizations do business on a few selected number of
goods and services which are produced from the joint efforts and
services of many employees. There is very little revenue that a
company earns which could justifiably be claimed as that due to efforts
and labour of just one particular employee.
Secondly, unlike daily hired labour most organizations engage their
employees over a long period. There is hardly any job which could be
executed by a spot contract of hired labour. Most employees’ works
and efforts are evaluated only over a period of time. And, within this
long period there could be many changes in environmental factors that
could affect the performance and output of those employees. And, so is
the worth of their jobs.
Apart from these job-worth-related complexities, an employee
compensation decisions are influenced by three other factors, viz. an
employee requirements of income for living, an organization’s ability
to pay, and its long-term strategic needs. An employee chooses to work
in a company because it is a way to earn his/her living.
If this minimum sustenance requirements for an employee and
his/her immediate family members are not met by the employer, then
the employee’s biological renewal process could be in jeopardy and
he/she will be in his/her own right to seek alternative means to protect
his/her life. The result is that an employee whose sustenance is not
guaranteed by an employer cannot be expected to show up for job the
next day.
No wonder work place absenteeism is so high among lower level
factory workers. In other words, an employer must ensure that the
wage he/she is paying to an employee is sufficient to meet the basic
biological needs of the employee and his/her family. This sustenance
issue and consequent salary adjustment could become complicated
when inflationary pressure in the economy is very high or when an
employer moves his/her employees across different locations of widely
varying cost of living.
Further, the very definition of basic needs is local environment driven
and a moving target rather than a static universal law of nature! A
basic need that was defined say in the 1950s could not be considered
as valid in 2010. Similarly, a basic need for employees working in an
agricultural farm could not be used as a valid package for someone
working in a five star hotel or in a hazardous job of digging coal in
underground mines.
The company’s ability to pay is another factor that may affect its
compensation rates. Employees working in a company that is making
good profit are found to earn more than employees doing similar jobs
in other companies which are making less profit.
In good times, most employers tend to make higher payment to their
employees because it ensures better relations between management
and workers and creates a sense of ownership and pride among rank
and file employees. Such above average compensation rate also makes
these companies a preferred place of work to job seekers which may
reduce their employee search cost substantially.
With fast-changing conditions of external environment of business,
success requires long-term planning. Companies now prefer to make
employment contract with long- term evaluation of worth of an
employee rather than for his/her their current position and contri-
bution. This means even if an employee’s actual worth of current
contribution is not very high yet a company may prefer paying
him/her more than his/her worth if it finds he/she is likely to be very
useful in the near future.
In our country, with economic liberalization and relaxation of
governmental control on managerial compensation, the compensation
system of commercial organizations in general and their managerial
compensation in particular have been going through rapid change.
Many of them are choosing a compensation policy not just to meet
their requirements of human resource services for today but to get
those types of employees who may be able to provide them
competitive advantage over a period of time.
Faced with shortage of qualified and experienced professionals, or-
ganizations are experimenting with various types of new
compensation policies to attract and retain the best employees as well
as to reach out a larger of pool of talented fresh graduates of reputed
management and technological institutes.
Employee Compensation – 10 Main Objectives
The main objectives of employee compensation are the
following:
ADVERTISEMENTS:
1. To attract well-qualified and competent personnel.
2. To motivate them for higher levels of performance by making
arrangement of incentive payments.
3. To retain the present workforce by keeping their pay levels at the
competitive levels.
4. To raise the morale of workforce.
5. To establish internal as well as external equity. Internal equity
refers to payment of similar wages for similar work. External equity
means payment of similar wages to similar jobs in comparable firms.
6. To maintain the labour and administrative costs in line with the
ability of the organization to pay.
7. To comply with wage legislation.
8. To project a good image of company.
9. To satisfy employees and to reduce the incidents of grievances,
absenteeism and quitting.
10. To reward the desired behaviour such as good performance,
loyalty, dedication, etc.
Employee Compensation – Factors Influencing:
External Factors and Internal Factors
The significant factors affecting the employee compensation can be
grouped together into two broad categories, external and internal
factors.
1. External Factors:
(i) Demand and supply of labour in the labour market.
(ii) Labour union influence.
(iii) Government policies like Minimum Wages Act, 1948, the Equal
Remuneration Act 1976, etc.
(iv) The prevailing rate of pay or comparable wage rates also influence
the employee compensation.
(v) The present cost of living.
(vi) The state of the economy (boom, recession, depression, etc.).
(vii) Advancement of technology also influences the fixation of wage
levels.
2. Internal Factors:
These factors include the following:
(i) Ability of the organization to pay.
(ii) The performance, experience and seniority of the employee.
(iii) Requirements of the job such as physical and mental abilities.
(iv) Job evaluation helps to establish satisfactory wage differentials.
(v) Organization’s strategy regarding employee compensation.
Employee Compensation – 4 Major Components: Basic
Wages, Dearness Allowance, Bonus and Allowances
The major components or constituents of employee
compensation may include the following:
Component # 1. Basic Wage:
Basic wage is a stable wage paid over a period of time which could be
on a monthly, weekly or daily basis. This wage is the normal rate for a
given level of output. Thus, given a certain job, with all its attendant
requirements of education, skills, training and expertise, it is the price
to be paid to get it done.
It is usually progressive over time, that is, it progresses more evenly
over time if there is a running grade, otherwise it remains fixed with
no changes. It is the basic wage that provides a stable base to the wage
structure.
The fixation of basic wage is affected by statutory minimum wage,
recommendations of Indian Labour Conference, patterns set by the
awards of industrial tribunals, directives of the Pay Commissions,
collective bargaining, wage settlements, periodic job evaluation and so
on.
The basic wage may differ from job to job, depending on minimum
educational and professional qualifications, training, skills, expertise,
experience, skills and so on required by a particular job. It may also
differ based on mental and physical requirements, responsibilities
assigned, stress involved and so on.
Component # 3. Bonus:
Since some authors consider bonus as a deferred wage, it may be
considered as a constituent of wage structure. In our country, payment
of bonus is regulated as per the provisions of the Payment of Bonus
Act, 1965.
Component # 4. Allowances:
Another component of the wage structure are various allowances
which vary from organisation to organisation, industry to industry and
region to region. Some of these allowances have become statutory.
Some of the popular allowances comprise house rent allowance, city
compensatory allowance, leave travel concession, educational
allowance, transport allowance, night duty allowance, hill allowance,
shift allowance, book allowance, medical allowance, heat allowance,
family allowance, uniform allowance, hazard allowance and so on.
Employee Compensation – 7 Steps Involved in
Compensation Planning
The steps involved in employee compensation planning are
as follows:
1. Understanding the company’s wage philosophy, guidelines, policy
and so on.
2. Defining the boundaries and limits of employees in the
organisation.
3. Knowing the expectations and want lists of the employees.
4. Estimating cost of various alternative programmes and comparing
the same with the estimates of their effectiveness.
5. Cost-benefit analysis of financial and non-financial rewards.
6. Recognising a part of compensation cost as investment in
employees which pays for long.
7. Based on all of these, working out a final pay package including
financial and non-financial rewards.
However, compensation planning is not a simple exercise. It has to
keep into consideration several things such as wage theories, job
evaluation, job pricing, incentive plans, supplementary benefits and
national wage policy.
Employee Compensation – Steps for Determining
Compensation Process
Compensation is very important for the employee as his livelihood
depends on it and it is his salary that determines his purchasing
power. Compensation affects a person not just economically but also
psychologically.
Thus, compensation should be determined very
systematically by following the steps mentioned below:
Step # 1. Conduct Job Analysis:
It provides crucial information in designing pay systems. It describes
the duties, responsibilities and other important job characteristics.
Thus, it helps to determine and weigh the compensable factors
(experience, skill, responsibility, effort, etc.).
Step # 2. Rate Worth of All Jobs by Job Evaluation:
The next step is to determine the worth of jobs with the help of job
evaluation. This is to achieve internal equity. For each degree of a
compensable factor, some points are assigned.
Step # 3. Create a Job Hierarchy:
In this stage, the points assigned to all compensable factors are
aggregated. The listing of jobs is done in the order of their importance
to the organization (starting from highest point to lowest point).
Step # 4. Conduct Market Survey:
After job hierarchy is created, the next step is to determine the
prevailing wage rates. This is done to achieve external equity. Usually,
a survey is conducted on a sample of selected key jobs and selected
companies in the industry. Thus, the rates of key jobs in the labour
market are determined.
Step # 5. Establish a Pay Policy:
The market survey may provide a range of wage and salary rates. The
organization has to decide its pay policy keeping in view this range.
Step # 6. Pricing the Jobs:
In this step, the job evaluation worth is matched with labour market
worth. Then appropriate pay levels for each job are established and
different pay levels are grouped into pay grades.
Step # 7. Achieve Individual Equity:
Individual equity refers to fairness in pay decisions for employees
holding the same job. At this stage, each employee is assigned a pay
rate within the range established for his job. Generally, firms use
previous experience, seniority and performance appraisal ratings to
determine how much an employee should be paid within that job’s pay
range.
Employee Compensation – Importance
A good compensation policy helps to motivate the employees to
perform well. The remuneration that the workers receive for services
rendered motivates them. A well designed structured compensation
policy helps to secure the interest of the employees as well as to ensure
effective organisation operation and attainment of overall
organisational objectives.
The importance of compensation is discussed below:
1. It helps to determine fair, just and equitable pay for the workers. It
tries to ensure that the paid fairly for their contributions to the
organization.
2. A sound remuneration policy motivates the workers to work
efficiently to achieve the specific standards.
3. Remuneration is the basis of happiness and satisfaction of the
workforce. This helps in reducing labour turnover.
4. A sound, fair equitable remuneration policy helps to avoid conflict
between the employer and the employees and establishes a peaceful
relation between them.
5. It improves the morale and efficiency of the workers.
Obviously, to any employee, pay is the most important reason for
working to earn livelihood. For some individuals, it may be the only
reason. For most of us, it is the means by which we provide for our
own and our family’s needs.
Compensation represents a large proportion of the expenditure. In
manufacturing firms, it is seldom lower than 20 per cent; in service
enterprises, it is often as high as 80 per cent
(www(dot)eridlc(dot)com). More importantly, organizations try to
accomplish many goals with compensation. These goals include
attracting and retaining people, and motivating them to perform more
effectively to achieve business goals. Compensation is also significant
in the operation of the economy.
Salaries and wages are the largest contributing factors to the national
income of many countries in the world and India is not an exception.
