Human Resource Management

Module -II
6. Compensation Management

Concepts
It is managing and determining an employer’s compensation to the employees in return for their
work.
Compensation management involves managing, analyzing, and determining the salary, benefits,
and incentives paid to the employees. Compensation management plays a crucial role in
attracting and retaining top talent. It includes monetary as well as non-monetary benefits. It also
increases employee productivity and reduces employee turnover.
Additionally, it ensures that every employee gets paid a fair wage based on industry standards,
work experience, company budget, etc.
Money paid to employees for their work in the form of gross pay is included under direct
compensation; while benefits come under indirect compensation and they may consist of life,
accident and health insurance, the contribution of an organization to retirement i.e. retirement
benefits, expenses incurred for employee welfare as social security etc.
All these things are nothing but the compensation the employees receive in return for their
contribution to their organization. From the viewpoint of an organization, compensation
management is a major function. Compensation Management is one of the most important topics
in HRM. This is one area which needs all the attention as it can have a direct impact on all
others.
Compensation Management is concerned with the compensation to employees for their work and
contribution for attaining organizational goals. Obviously, it is concerned with designing and
implementing total compensation package. It is also known as wage and salary administration or
remuneration management.

Components;
1. System of Wage Payment
The system of wage payment is the method adopted by organizations to remunerate workers. It is
the way of giving financial compensation to the workers for the time and effort invested by them
in converting materials into finished products. It indicates the basis of making payment to the
workers, which may be either on time basis or output basis. The selection of the system depends
on the type and nature of the concern and its products.
Wages are the biggest incentive for employees to perform their jobs sincerely and error free.
Several wage systems have been devised for fulfilling the requirements of both employees and
employers.
Thus, the wage system should be planned carefully. A system that reduces the labour cost per
unit while increasing the output and giving a fair return to workers will be the most suitable one.
The aim of the wage system should be the introduction of a fair wage.
A good wage system should possess the following characteristics:
(i) Simplicity: The wage system should be easy to understand and simple to operate. A complex
system may lead to strikes and agitations and may be a hindrance to a harmonious employer-
employee relationship.
(ii) Fair to Employer and Employee: The system should be satisfactory from the point of view
of both employer and employees.
(iii) Guaranteed minimum wage: The system should guarantee a minimum wage to every
worker irrespective of the work done by them.
(iv) Incentive to work: Adequate incentives should be provided to the workers to work hard
with great care. Efficient workers should be able to earn more wages as compared to the
inefficient workers.
(v) Quality output: The system should encourage the workers not only to increase the quantity
of output but also to improve the quality of output.
(vi) Certainty: There shouldn’t be any ambiguity in the wage distribution.
(vii) Conformity with local and national labour laws: The system should to conformity with
various labour laws and regulations both local and national.
(viii) Minimization of labour turnover: The system should minimize labor turnover,
absenteeism and late attendance.
(ix) Adjustment to price changes: The system should invariably contain provision for
automatic rise in wages as cost of living index increases.
(x) Flexibility: The system should incorporate flexibility to adjust with changing circumstances
of the business.

2. Job evaluation
Job evaluation is the systematic process of determining the relative value of different jobs in an
organization. The goal of job evaluation is to compare jobs with each other in order to create a
pay structure that is fair, equitable, and consistent for everyone. This ensures that everyone is
paid their worth and that different jobs have different entry and performance requirements.
Job evaluations are developed by HR, often together with workers unions and other social
partners and commercial consultancy companies.
Job evaluation requires some basic job analysis to provide factual information about the jobs
concerned. The starting point is often the job analysis and its resulting job description. Based on
this, the job is evaluated. One of the key criteria in the evaluation is the added value of the job to
the organization. Based on this evaluation, the job is added to the job structure. The resulting
structure ensures pay transparency and equity between gender and minorities.
Job evaluations are a step-by-step process to determine how much money a position should earn.
There are different methods of job evaluation, but the point of each method is determining the
value the position brings to the company. This ensures the salary is equal to the work. The HR
department performs job evaluations based on the role rather than on the employee who holds
the position. This typically occurs when a company is new or adding additional roles.

3. Wage/ salary fixation

Usually, four steps are involved in arriving at specific job rates - performing a job analysis,
grading a job, assigning price to each job and administering the resulting program. The process
of job analysis results in job descriptions which lead to job specifications. A job analysis
describes the duties, responsibilities, working conditions and inter-relationship, between the job
as it is and the other jobs with which it is associated. It attempts to record and analyze details
concerning the training skills, required efforts, qualifications, abilities, experience and
responsibilities expected of an employee. After determining the job specification, the actual
process of grading, rating or evaluating its value relative to all the other jobs in the organization
which are subject to evaluation. The next step is that of providing the job with a price. This
involves converting the relative job values in to specific monetary values or translating the job
classes into rate ranges. Finally, after the wage range for each job is established, the specific
wage rate within the range for each employee must be determined; this leads to the process of
employee appraisal.
The Minimum Wages Act 1948 generally specifies minimum wage rates on a per day basis, and
extends to the entire country and is revised within a period of not less than five years, however
there is a provision to increase dearness allowance every two years.

4. Incentives
The main purpose of incentive is to tie employees’ rewards closely to their achievements. This
tie is done by providing more compensation for better performance. Individual will generally
strive for additional rewards by higher production and their performance depends upon higher
efforts. Some people may prefer some extra time off rather than more money.
An incentive provides additional compensation for those employees who perform well. It
attempts to tie additional compensation as directly as possible to employee productivity.
Incentive in simple terms is something that encourages a person or organization to do or achieve
something. It is something that incites or has a tendency to incite a determination. This is usually
given in cash or in kind.
In business, the objective of incentive is to increase employee productivity, improve industrial
and interpersonal relations, and as result increase the overall profit of the organization.
There are two types of incentives:
a. Financial
Financial incentive pertains to those incentives which are in the form of money or can be
measured in monetary terms. This is sometimes referred to as monetary benefit offered to
consumers, employees, and organizations to encourage behavior or actions which otherwise
would not take place. Like dearness allowance, clothing allowances, house rent allowances,
bonus, profit-sharing, commission etc.
b. Non-Financial
These are types of rewards that do not form part of an employee’s pay or cannot be measured in
terms of money. While the monetary and future security needs are important, the fulfillment of
an individual’s social, psychological, and emotional needs also plays an important role. Like
status, career Advancement opportunity, job security, employee participation and empowerment
etc.

5. Bonus
A bonus is a financial compensation that is above and beyond the normal payment expectations
of its recipient. Companies may award bonuses to both entry-level employees and to senior-level
executives. While bonuses are traditionally given to exceptional workers, employers sometimes
dole out bonuses company-wide to stave off jealousy among staffers.
In workplace settings, a bonus is a type of additional compensation an employer gives to an
employee that complements their base pay or salary. A company may use bonuses to reward
achievements.
Some common types of bonuses are:
a. Profit-sharing
Profit-sharing is a type of bonus where employees are given a percentage of the company's
profit.
b. Spot bonus
A spot bonus is awarded for exceptional performance on a certain task. For instance, you can get
this financial reward when you go above and beyond your normally assigned duties. Spot plans
are usually meant for individuals and not for teams.
 c. Referral bonus
A company gives out a referral bonus to current employees for referring new hires. This bonus
structure can help companies recruit new talent quickly when they experience a rapid rate of
growth or when new departments have opened up.
d. Signing bonus
Some companies give a signing bonus to new employees when they first accept the job offer.
Different companies have different rules for releasing the signing bonus. Some companies give it
immediately after the completion of the onboarding process, while some firms pay it after a few
months.
e. Milestone bonus
Companies give a milestone bonus, also called a mission or task bonus, for achieving a milestone
on a project or a goal. This bonus is usually allocated to projects with critical deadlines.
f. Project bonus
A company can award a project bonus after the completion of a project. Most companies use a
project bonus to keep their employees motivated.
g. Annual bonus
Companies can give an annual bonus to their employees based on their yearly performance.
h. Holiday bonus
A holiday bonus is usually a gift that companies give to their employees during the holiday or
festival season. These bonuses are neither performance-based nor time-based. Some companies
give gifts to their employees, while some give monetary rewards, like one month's salary.

6. ESOPs
An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers
employees an ownership interest in the organization. Employee stock ownership plans are issued
as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in
deciding who could avail of these options.
An organization grants ESOPs to its employees for buying a specified number of shares of the
company at a defined price after the option period (a certain number of years). Before an
employee could exercise his option, he needs to go through the pre-defined vesting period which
implies that the employee has to work for the organization until a part or the entire stock options
could be exercised.
Employees can use their ESOPs to purchase business stock at allowed prices that are lower than
the market value. Employees can also sell shares purchased through ESOPs and profit from their
investments.
If an employee leaves or retires before the vesting term, the corporation must purchase back the
ESOP at fair market value within 60 days.
Organizations often use Employee stock ownership plans as a tool for attracting and retaining
high-quality employees. Organizations usually distribute the stocks in a phased manner. For
instance, a company might grant its employees the stocks at the close of the financial year,
thereby offering its employees an incentive for remaining with the organization for receiving that
grant. Companies offering ESOPs have long-term objectives.
Not only do companies wish to retain employees for the long term, but also intend to make them
the stakeholders of their company. Most of the IT companies have alarming attrition rates, and
ESOPs could help them bring down such heavy attrition Start-ups offer stocks for attracting
talent. Often such organizations are cash-strapped and are unable to offer handsome salaries. But
by offering a stake in their organization, they make their compensation package competitive.
With ESOPs, an employee gets the benefit of acquiring the shares of the company at the nominal
rate, and selling them (after a defined tenure set by his employer) and making a profit. There are
several success stories of an employee raking in riches together with founders of the companies.
A very notable example is Google when it went public. Its founders Sergey Brin and Larry Page
became the richest persons in the world, even the stock-holder employees earned millions too.

7. Fringe Benefits
Fringe benefits are additions to compensation that companies give their employees. Some fringe
benefits are given universally to all employees of a company while others may be offered only to
those at executive levels. Some benefits are awarded to compensate employees for costs related
to their work while others are geared to general job satisfaction.
Fringe benefits are the additional benefits offered to an employee, above the stated salary for the
performance of a specific service. Some fringe benefits such as social security and health
insurance are required by law, while others are voluntarily provided by the employer.
Examples of optional fringe benefits include free breakfast and lunch, gym membership,
employee stock options, transportation benefits, retirement planning services, childcare,
education assistance, etc.
Some fringe benefits are:
a. Health insurance
This fringe benefit is contained in the Patient Protection and Affordable Care Act. It requires
businesses that employ more than 50 people to provide healthcare plans, and employees are
required to have health insurance coverage. The health care plans cover visits to primary care
physicians, specialist doctors, and emergency care.
 b. Medical leave
Businesses that employ over 50 employees are required by law to provide family and medical
leave to an employee who has worked for over one year in the company. The medical leave is
unpaid, protected, and can last up to 12 weeks.
c. Worker’s compensation
The worker’s compensation benefit is administered by the Department of Labor to federal
workers who are injured at their workstation or acquire an occupational disease. Employees are
provided with medical treatment, wage replacement benefits, rehabilitation, and other benefits.
The compensation requirements vary by state, and injured employees should contact their state
worker’s compensation board.
d. Paid holidays
Paid holiday is a type of leave given to a worker by a hiring company that allows workers to take
time away from work while continuing to receive an income.

8. Retirement Benefits
The retirement benefits mainly consist of the employees' leave encashment (employees are
allowed to accumulate leaves and exchange them for cash on their retirement), retirement
gratuity, and the amount that they were contributing to their provident fund account throughout
their service.
A retiree is entitled to the following benefits:-
a. Pension: - which is recurring monthly payment. Further every pensioner is eligible to
commute a portion, i.e. 40% of monthly pension. (CCS Pension Rule49)
b. Retirement/ Death Gratuity : Subject to the eligibility the retire is entitled to ½ month’s
emoluments for every completed year of service subject to a maximum of 16-1/2 months
emoluments, limited to Rs.3,50,000. (CCS Pension Rule-50)
c. Commutation of Pension: Pension may be commuted to the extent of 40 %. It will be
restored after 15 year. (CCS Commutation of Pension) Rules 1981.
d. Encashment of Leave: The retiree gets cash equivalent to the emoluments for accumulated
earned leave at his credit subject to maximize of 300days. e. C.G.E.I. scheme- The pensioner
gets refund of his contribution towards C.G.E.I. scheme as per the prescribed chart issued for
every year.

Compensation Plans
A compensation plan is a payment package designed to attract and retain employees. A basic
compensation package consists solely of a salary or wages. A more comprehensive
compensation package could include additional benefits such as bonuses, perks, commission,
health insurance, or retirement investments. Compensation plans involve offering fair and
competitive payments that simultaneously align with the company budget and promote business
success.
Compensation packages that adequately reward people for their hard work can drive business
profit. An effective compensation plan:
 Illustrates company integrity and transparency
 Assists in attracting and retaining top talent
 Boosts employee motivation and loyalty
 Reduces turnover and hiring expenses
a. Direct compensation
Direct compensation refers to the financial payments given to people in exchange for time
worked or results obtained. Examples of direct compensation include salaries, bonuses, and
equity.
 Salary: Salaries are the bedrock of your company’s compensation plan. They can align
with local costs of labor or reflect national pay rates for similar roles. We recommend
keeping geography, job responsibilities, cost of living, and external market data in mind
when calculating salaries.
 Bonuses: Bonuses are additional compensation often used to reward team members for
high performance. When calculating bonuses, it’s useful to consider the following three
questions: Who is eligible for a bonus? Which targets should they hit to earn a bonus?
What should our payment structure look like?
 Equity: Equity compensation offers people a stake, or partial ownership, in the company.
This benefits an organization by incentivizing talented members of the team to remain
with the company. It also encourages high performance—if the company succeeds,
everyone succeeds.

b. Indirect compensation
To keep pace with an ever-evolving work landscape, many companies have adopted holistic,
people-driven strategies to improve their company culture and attract and retain talent.
Competitive salaries are rarely enough anymore.
To tackle the “Great Resignation,” many companies now offer a variety of indirect compensation
benefits and development opportunities. Indirect compensation varies from company to
company, and often includes:
 Medical insurance
 Retirement benefits
 Wellness benefits (e.g., gym memberships)
 Educational incentives
 Mental health services (e.g., therapy or counseling)
 Volunteer opportunities
 Hybrid working arrangements
 Disability insurance (DI)
 Paid holidays
 Childcare initiatives
 Relocation stipends or housing options