1 Prof R K Singh AIMA Centre for Management Education New Delhi.

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Prof R K SinghProf R K SinghAIMAAIMA

Centre for Management EducationCentre for Management EducationNew DelhiNew Delhi

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eHR 01 Human Resource ManagementeHR 01 Human Resource Management

Compensation :Compensation :

The HRM function that deals with every The HRM function that deals with every type of reward individuals receive in type of reward individuals receive in exchange for performing exchange for performing organizational tasks.organizational tasks.

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Compensation :Compensation : It is the major cost of doing business for It is the major cost of doing business for

many organizations.many organizations. It is the chief reason why most individuals It is the chief reason why most individuals

seek employment.seek employment. Employees exchange/trade labour and Employees exchange/trade labour and

loyalty for financial and non-financial loyalty for financial and non-financial compensation.compensation.

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Objectives of Compensation :Objectives of Compensation : To create a system of rewards that is To create a system of rewards that is

equitable to the employee and the employer equitable to the employee and the employer alike.alike.

The desired outcome is an employee who is The desired outcome is an employee who is attracted to the work and motivated to do a attracted to the work and motivated to do a good job for the organization.good job for the organization.

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The most important objective- “Fairness/Equity The most important objective- “Fairness/Equity has three dimensions:has three dimensions:

1.1. Internal Equity : Ensuring more compensation Internal Equity : Ensuring more compensation for more difficult jobs.for more difficult jobs.

2.2. External Equity : This ensures that jobs are External Equity : This ensures that jobs are fairly compensated in comparison to similar fairly compensated in comparison to similar jobs in the labour market.jobs in the labour market.

3. Individual Equity : This ensures equal pay for 3. Individual Equity : This ensures equal pay for equal work.equal work.

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7 Criteria for Effectiveness of Compensation:7 Criteria for Effectiveness of Compensation:

1.1. AdequateAdequate

2.2. EquitableEquitable

3.3. BalancedBalanced

4.4. Cost-effectiveCost-effective

5.5. SecureSecure

6.6. Incentive ProvidingIncentive Providing

7.7. Acceptable to the employeeAcceptable to the employee

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Effective Compensation Program Helps In -Effective Compensation Program Helps In - Attracting TalentAttracting Talent Retaining TalentRetaining Talent Ensuring EquityEnsuring Equity Developing New/Desired BehaviourDeveloping New/Desired Behaviour Controlling CostsControlling Costs Complying with Legal RulesComplying with Legal Rules

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Determination of Individual Pay :Two Basic IssuesDetermination of Individual Pay :Two Basic Issues How should one employee be paid relative to How should one employee be paid relative to

another when they both hold the same job?another when they both hold the same job?

““Should we pay all employees doing the same Should we pay all employees doing the same work at the same level the same?”work at the same level the same?”

If not, on what basis should we make the If not, on what basis should we make the distinction-seniority or merit or some other distinction-seniority or merit or some other basis?basis?

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Pay Differentials are based on :Pay Differentials are based on : Individual differences in Experiences, Individual differences in Experiences,

Skills and PerformanceSkills and Performance Expectations that seniority, higher Expectations that seniority, higher

performance or both deserve higher performance or both deserve higher pay.pay.

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Methods of Payment :Methods of Payment :

Employees can be paid for -Employees can be paid for - The Time They WorkThe Time They Work The Output They ProduceThe Output They Produce SkillsSkills KnowledgeKnowledge CompetenciesCompetencies

Or A Combination of These FactorsOr A Combination of These Factors

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Methods of Payment :Methods of Payment :

Flat Rate : Single Flat Rate regardless of Flat Rate : Single Flat Rate regardless of seniority or performance.seniority or performance.

Payment for Time Worked :Payment for Time Worked :

Wage : Payment is calculated at an hourly rate.Wage : Payment is calculated at an hourly rate.

Salary : Pay calculated at an annual or monthly Salary : Pay calculated at an annual or monthly rate.rate.

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Variable Pay : Incentive CompensationVariable Pay : Incentive Compensation

1.1. Merit Incentive (Based on the Performance Rating)Merit Incentive (Based on the Performance Rating)

2.2. Individual Incentives (units produced/sold)Individual Incentives (units produced/sold)

3.3. Team IncentivesTeam Incentives

4.4. Organization-wide IncentivesOrganization-wide Incentives

5.5. Stock Option PlansStock Option Plans

Fringe Benefits :Fringe Benefits : The extra benefits provided to The extra benefits provided to employees in addition to the normal compensation employees in addition to the normal compensation paid in the form of wage or salary.paid in the form of wage or salary.

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Main Features of Fringe Benefits :Main Features of Fringe Benefits :

1.1. Supplementary Forms of Compensation :Supplementary Forms of Compensation :

2.2. Paid to all employees (Unlike Incentive)Paid to all employees (Unlike Incentive)

3.3. Indirect Compensation, usually extended as a Indirect Compensation, usually extended as a condition of employment and are not directly related condition of employment and are not directly related to performance.to performance.

4.4. Help raise the living conditions of employees.Help raise the living conditions of employees.

5.5. May be statutory or voluntary: PF is a statutory May be statutory or voluntary: PF is a statutory benefit whereas Transport is a voluntary benefit.benefit whereas Transport is a voluntary benefit.

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Need for Benefits :Need for Benefits :

1.1. Employees’ DemandsEmployees’ Demands

2.2. Trade Union DemandsTrade Union Demands

3.3. Employer’s PreferenceEmployer’s Preference

4.4. As a Social securityAs a Social security

5.5. To Improve Human RelationsTo Improve Human Relations

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Types of Fringe Benefits :Types of Fringe Benefits :

1.1. Payment for Time Not Worked e.g. Paid Holidays.Payment for Time Not Worked e.g. Paid Holidays.

2.2. Employee Security :Employee Security :

e.g. Retrenchment Compensation : Industrial Disputes e.g. Retrenchment Compensation : Industrial Disputes Act 1947 “One month’s notice or salary to all the Act 1947 “One month’s notice or salary to all the workers who are retrenched/laid-off after one year’s workers who are retrenched/laid-off after one year’s of continuous service”.of continuous service”.

Applicable to non-seasonal industrial establishments Applicable to non-seasonal industrial establishments employing 50 or more workers.employing 50 or more workers.

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3.3. Safety and Health : Accident/Health InsuranceSafety and Health : Accident/Health Insurance

4.4. Workmen’s Compensation Act 1923 :Workmen’s Compensation Act 1923 :

To meet the contingency of invalidity or death of a To meet the contingency of invalidity or death of a worker due to an employment injury or an worker due to an employment injury or an occupational disease.occupational disease.

5.5. Health BenefitsHealth Benefits

6.6. Voluntary ArrangementsVoluntary Arrangements

7.7. Welfare and Recreational FacilitiesWelfare and Recreational Facilities

8.8. Old Age and Retirement BenefitsOld Age and Retirement Benefits

1 Prof R K Singh AIMA Centre for Management Education New Delhi.

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