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Compensation Factors and Strategies

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14 views9 pages

Compensation Factors and Strategies

Uploaded by

sadia_00
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Chapter 8: Compensation and Benefits

Compensation:

– Compensation is the total of all rewards provided to employees in return


for their services.
– Compensation is a systematic approach of providing financial value to
employees in return to their contributions to the organization and in-
exchange of work performed.
– Compensation may be adjusted according to:
 business needs,
 Business goals
 and available resources.

Benefits

Various items of value beyond wages that employees receive from the
organization

• Rewards

• Incentives

Purpose of compensation

 To attract
 To retain and
 To motivate employees

Importance of employee compensation and benefits

 Ensure employee’s livelihood


 Recruit and retain qualified employees
 Increase or maintain morale/satisfaction
 Reward and encourage peak performance
 Reduce turnover and encourage company loyalty
 Administer pay within legal regulations
 Achieve internal and external equity
Internal equity: Comparisons made by employees to other employees within the
same organization

External equity: Comparisons made by employees to others employed by


different organizations performing similar jobs

Components of Compensation
A. Financial Compensation
i. Direct Financial Compensation
ii. Indirect Financial Compensation
B. Nonfinancial Compensation
A. Financial Compensation
i. Direct Financial Compensation:
Money is included under the direct financial compensation popularly known as
wages/gross pay. There are direct financial payments in the form of the wages,
salaries, incentives, commission and bonuses.

Wages and salary:


– Wages represent hourly rates of pay, and
– Salary refers to the monthly rate of pay, irrespective of the number of hours
put in by the employee.
– Wages and salaries are subject to the annual increments.
– They differ from employee to employee, and depend upon the nature of job,
seniority, and merit.
Incentives:
– Incentives are paid in addition to wages and salaries and are also called
‘payments by results’.
– Incentives depend upon productivity, sales, profit, or cost reduction efforts.
– There are:

(a) Individual incentive schemes: Individual incentives are applicable to specific


employee performance and

(b) Group incentive Programmes. Where a given task demands group efforts for
completion, incentives are paid to the group as a whole. The amount is later
divided among group members on an equitable basis.

Commission:

– Commission is what you pay to employees when they make a sale or


accomplish some other goal. Commissions can be a percentage of a sale, or
they can be a flat amount based on the sales volume.

Bonuses:

– Bonus means extra cash paid to an employee for exceeding his performance or
on completion of specified project or target.

ii. Indirect Financial compensation


Benefits come under indirect financial compensation. Benefits are usually known
as fringe benefits because they are offered by employer to the employee as a
fringe (free of cost). They are supplements to wages received by employee at a
cost to employer. It may consist of:
 Pay for time not worked (holidays, leaves, paid vacations)
 Protection programs (insurance, pension, or gratuity)
 Executive benefits (telephone, security guards, newspapers)
Fringe benefit: They include the benefit of:
(a) Provident fund,
(b) Gratuity,
(c) Medical care,
(d) Hospitalization payment,
(e) Accident relief,
(f) Health and Group insurance,
(g) Subsidized canteen facilities,
(h) Recreational facilities, and
(i) Provision of uniforms to employees.

Perquisites:
– A benefit which one enjoys or is entitled to on account of one's job or position.
– There are special benefits offered to managers/executives.
– The purpose is to retain competent executives.
– Perquisites include the following:
 Company car for traveling,
 Club membership,
 Paid holidays,
 Furnished house or accommodation,
 Stock option schemes, etc.

B. Non-Financial Compensation (non-monetary benefits):


– Satisfaction person receives from job itself or from psychological and/or
physical environment in which person works. These benefits give
psychological satisfaction to employees even when financial benefit is not
available.

Such benefits are:


 Career development and advancement opportunities( Promoting growth
prospects)
 Opportunities for recognition (Offering challenging job responsibilities)
 Recognition of merit through certificate, etc.
 Comfortable working conditions
 Achievement awards, prizes, gift cards
 team leadership opportunities,
 personal day (birthday celebrations)
 paid training,
 new office or workspace upgrade
 or even paid parking or transit passes.
 Competent supervision, and
 Job sharing and flexi-time

Factors determining employee compensation and benefits

Internal factors: The internal factors exist within the organization and influence
the pay structure of the company. These are as follows:

1. Ability to Pay: The prosperous or big companies can pay higher compensation as
compared to the competing firms whereas the smaller companies can afford to
maintain their pay scale up to the level of competing firm or sometimes even
below the industry standards.
2. Business Strategy: The organization’s strategy also influences the employee
compensation. In case the company wants the skilled workers, so as to outshine
the competitor, will offer more pay as compared to the others. Whereas, if the
company wants to go smooth and is managing with the available workers, will
give relatively less pay or equivalent to what others are paying.

3. Job Evaluation and Performance Appraisal: Job evaluation is an assessment of


the relative worth of various jobs on the basis of a consistent set of job and
personal factors, such as qualifications and skills required. The objective of job
evaluation is to determine which jobs should get more pay than others. The job
evaluation helps to have a satisfactory differential pays for the different jobs. The
Performance Appraisal helps an employee to earn extra on the basis of his
performance.
4. Employee: The employee or a worker himself influences the compensation in one
of the following ways.
Performance: The better performance fetches more pay to the employee, and
thus with the increased compensation, they get motivated and perform their job
more efficiently.
Experience: As the employee devotes his years in the organization, expects to get
an increased pay for his experience.
Potential: The potential is worthless if it gets unnoticed. Therefore, companies do
pay extra to the employees having better potential as compared to others.

External Factors: The factors that exist out of the organization but do affect the
employee compensation in one or the other way. These factors are as follows:

1. Labor Market: The demand for and supply of labor also influences the employee
compensation. The low wage is given, in case, the demand is less than the supply
of labor. On the other hand, high pay is fixed, in case, the demand is more than
the supply of labor.
2. Going Rate: The compensation is decided on the basis of the rate that is
prevailing in the industry, i.e. the amount the other firms are paying for the same
kind of work.
3. Productivity: The compensation increases with the increase in the production.
Thus, to earn more, the workers need to work on their efficiencies that can be
improved by way of factors which are beyond their control. The introduction of
new technology, new methods, better management techniques are some of the
factors that may result in the better employee performance, thereby resulting in
the enhanced productivity.
4. Cost of Living: The employees must get sufficient amount of pay in order to
satisfy their wants and maintain a certain standard of living. The cost of living pay
criterion is usually regarded as an automatic minimum equity pay criterion. This
criterion calls for adjustments in payment of wages and salaries based increases
or decreased in an acceptable cost of living.
5. Labor Unions: The powerful labor unions influence the compensation plan of the
company. The labor unions are generally formed in the case, where the demand is
more, and the labor supply is less or is involved in the dangerous work and,
therefore, demands more money for endangering their lives. The non-unionized
companies or factories enjoy more freedom with respect to the fixation of the
compensation plan. Employers of non-unionized factories enjoy the freedom to
fix wages and salaries as they please.
6. Labor laws(Government Regulations): To improve the working conditions of
workers Government may pass legislation: Laws and regulations impact the
remuneration of employees in many areas, such as:
 Work hours and compulsory time-off (paid and unpaid)
 Minimum wage
 Overtime
 Compulsory bonuses
 Employment at will
There are several laws passed by the Government to safeguard the workers from
the exploitation of employers. The payment of wages Act 1936, The Minimum
wages act 1948, The payment of Bonus Act 1965, Equal Remuneration Act
1976, Payment of Gratuity Act 1972 are some of the acts passed in the welfare of
the labor, and all the employers must abide by these.
Compensation policies/strategies

Compensation policies –provide general guidelines for making compensation


decisions.

An organization establishes compensation policies that determine whether it will


be a

(a) Pay leaders (above market)


– Are orgs that pay higher wages and salaries than competing firms.
– Paying for higher qualified, more productive workers.
– Using this strategy—they (orgs) feel that they will be able to attract –high
quality productive employees.
– Higher paying firms usually attract more highly qualified applicants.

(b) Market rate (going rate): Middle Market


– The market or going rate is the average rate that most employers provide
for a similar job in a particular area or industry.
– Such firms believe that it can employ qualified people yet remain
competitive –by not having to raise the prices of its goods and services.

( c) Pay followers: (lag)

– Paying all that a firm can afford.


– Companies that choose to pay below the market rate –because of a
poor financial condition.
– Or a belief that they don’t require highly capable employees.

Common questions

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Government regulations like the Minimum Wages Act ensure a baseline level of income, thereby protecting workers from exploitation and ensuring a fair wage for their labor. Laws regulating employment conditions, such as compulsory time-off and minimum working hours, also establish standards that organizations must comply with, impacting compensation structures and operational flexibility. These regulations help standardize employer practices and ensure employee rights, thereby shaping the entire compensation landscape to achieve fairness and security for workers .

Fringe benefits, as part of indirect financial compensation, such as health insurance, retirement plans, and paid leave, offer employees additional value beyond direct pay. These benefits provide security and additional resources that enhance overall job satisfaction. By addressing long-term stability and immediate needs, they foster loyalty and encourage retention, as employees may value the comprehensive support system that these benefits yield over time .

Internal equity involves employees comparing their compensation to their colleagues within the same organization, which aims to ensure fairness among employees holding similar positions or performing similar tasks. This sense of fairness can enhance satisfaction and motivation. External equity, on the other hand, involves comparisons with employees at other organizations performing similar jobs, affecting an organization's ability to attract and retain talent. To maintain both, companies often benchmark pay scales against industry standards and peer organizations .

External factors such as labor market conditions significantly affect compensation strategies. When labor demand exceeds supply, organizations may increase wages to attract and retain talent. Conversely, an oversupply of labor may lead to lower compensation levels. Cost of living adjustments are necessary to ensure employees maintain purchasing power in varying economic climates. These factors compel organizations to adapt their compensation strategies continually to remain competitive and equitable .

Labor unions influence compensation plans by negotiating higher wages, better working conditions, and more comprehensive benefits for their members. They often use collective bargaining to ensure fair compensation, which can lead to better employer-employee relations by promoting transparency and fairness. However, tensions may arise if negotiations are contentious, potentially affecting workplace harmony. Overall, unions play a crucial role in advocating for employee rights and shaping compensation policies in favor of equitable practices .

Non-financial compensation components, such as career development opportunities, recognition, and comfortable working conditions, contribute significantly to employee motivation by addressing psychological and emotional needs. They provide intrinsic rewards that enhance job satisfaction, personal growth, and workplace morale. These components can fulfill needs for achievement, recognition, and personal development, which are paramount for long-term motivation and engagement in employees, even when direct financial incentives are limited .

Internal factors like business strategy directly impact compensation by dictating whether competitive pay is necessary to attract skilled employees. For innovative or rapidly growing firms, offering above-average compensation may be essential to secure talent critical for achieving strategic goals. Job evaluation helps in determining the relative value of positions within the organization, ensuring equitable pay distribution based on skill requirements and responsibilities. This structural alignment ensures compensation fairness and strategic alignment with organizational goals .

Organizations can adopt different compensation strategies based on their financial capability and business goals. Pay leaders offer higher salaries than competitors to attract more qualified candidates, thereby potentially boosting productivity and innovation. Market rate strategies involve aligning pay with industry averages, balancing competitiveness without inflating costs. Pay followers offer lower compensation, generally due to budget constraints or differing employer needs, which might impact the ability to attract skilled workers. The chosen strategy significantly influences recruitment and turnover rates by affecting perceived value and competitive advantage .

Employee experience often correlates with higher compensation as it usually translates to greater expertise and reliability. Organizations reward experience through increased pay or promotions to retain seasoned staff and benefit from their deeper understanding of company operations. Similarly, employees demonstrating high potential may receive additional compensation or advancement opportunities to motivate and retain skilled contributors whose capacity for future leadership or innovation is valuable to organizational growth .

Organizations may choose group incentive programs when tasks require collective effort for completion. These programs aim to foster cooperation, enhance team cohesion, and ensure equal contribution towards common goals. However, they may sometimes lead to social loafing if individual contributions become less visible, potentially diminishing motivation for some team members. Balancing group and individual incentives can harness both motivational structures effectively, promoting both collective and personal accountability in task performance .

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