Finance for HR Professionals - · PDF fileTheories of Wages: Subsistence Theory, Wage Fund...

Finance for HR Professionalsand

Compensation Management(As per the Revised Syllabus 2016-17 of Mumbai University

for T.Y.BMS, Semester V)

Deepali Vijay KamleMBA (Marketing), B.Com. (Management)

BMS Coordinator,Tolani College of Commerce, Andheri (East).

Tushar AgarwalSET, Ph.D. Scholar, MBA (Marketing),

MBA (Corporate Governance), M.Com. (Management),BMS Coordinator,

Chandrabhan Sharma College of Arts, Science & Commerce, Powai

ISO 9001:2008 CERTIFIED

© AuthorsNo part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording and/or otherwise without the prior written permission of the publisher.

First Edition : 2016

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PrefaceWe would like to thank our family, friends and students without

their support and encouragement; we would not have been able toachieve this feat.

Special thanks to S.K. Srivastava of M/s Himalaya PublishingHouse Pvt. Ltd.

It is a matter of great pleasure to hand over First edition of thisbook on “Finance for HR Professionals and CompensationManagement” to the students of T.Y. BMS course started by Universityof Mumbai.

The objective of the book is to orient students with financialconcepts used making HR decisions and also to understand variouscompensation plans. Today, we need to be aware on issues related tocompensation management and understand the legal framework ofcompensation management.

We have tried to make and present the book in simple and lucidlanguage.

Authors

SyllabusFinance for HR Professionals and

Compensation ManagementCourse Code: UBMSFSV.12

Learning Objectives:1. To orient HR professionals with financial concepts to enable them to

make prudent HR decisions2. To understand the various compensation plans3. To study the issues related to compensation management and

understand the legal framework of compensation management

Unit No. Modules/Units

Unit 1 Compensation Plans and HR Professionals

Meaning, Objectives of Compensation Plans, Role of HRProfessionals in Compensation Plans, Types of Compensation:Financial and Non-financial, Factors InfluencingCompensation.

Compensation Tools: Job-based and Skill-based, Models:Distributive Justice Model and Labour Market Model,Dimensions of Compensation.

3Ps Compensation: Concept, Benefits of Compensation:Personal, Health and Safety, Welfare, Social Security.

Pay Structure: Meaning, Features, Factors, Designing theCompensation System, Compensation Scenario in India.

Unit 2 Incentives and Wages

Incentive Plans: Meaning and Types: Piecework, Team,Incentives for Managers and Executives, Salespeople, MeritPay, Scanlon Pay, Profit Sharing Plan, ESOP, Gain Sharing,Earning at Risk Plan, Technology and Incentives. Prerequisitesof an Effective Incentive System.

Wage Differentials: Concepts, Factors Contributing to WageDifferentials, Types of Wage Differentials, Importance ofWage Differentials, Elements of a Good Wage Plan.

Theories of Wages: Subsistence Theory, Wage Fund Theory,Marginal Productivity Theory, Residual Claimant Theory andBargaining Theory.

Unit 3 Compensation to Special Groups and Recent Trends

Compensation for Special Groups: Team-based Pay,Remunerating Professionals, Contract Employees, CorporateDirectors, CEOs, Expatriates and Executives.

Human Resource Accounting – Meaning, Features, Objectivesand Methods.

Recent Trends: Golden Parachutes, e-Compensation, SalaryProgression Curve, Competency- and Skill-based, BroadBanding and New Pay, Cafeteria Approach – Features,Advantages and Disadvantages.

Unit 4 Legal and Ethical Issues in Compensation

Legal Framework of Compensation in India: Wage Policy in India,Payment of Bonus Act 1965, Equal Remuneration Act 1976,Payment of Wages Act 1936, Payment of Gratuity Act 1972,Employee Compensation Act 1923, Employees’ Provident FundsandMiscellaneous Provision Act 1952.

Pay Commissions: Wage Boards, Adjudication, LegalConsiderations, COBRA Requirement, Pay Restructuring inMergers and Acquisitions, Current Issues and Challenges inCompensation Management, Ethics in Compensation Management.

Question Paper PatternDuration: 2.5 Hours 75 Marks

N.B.: 5 questions of 15 marks each.All questions are compulsory.

Q.1. Attempt any 2

(a) 7.5 Marks(b) 7.5 Marks(c) 7.5 Marks

Q.2. Attempt any 2


Q.3. Attempt any 2


Q.4. Attempt any 2


Q.5. Case Study 15 Marks

ContentsChapter

No.Name Page

No.

Unit I: Compensation Plans and HR Professionals

1 Compensation Plans 1 – 8

2 Compensation Tools 9 – 16

3 3Ps of Compensation 17 – 22

4 Pay Structure 23 – 30

Unit II: Incentives and Wages

5 Incentive Plans 31 – 36

6 Wage Differentials 37 – 39

7 Theories of Wages 40 – 44

Unit III: Compensation to Special Groups andRecent Trends

8 Compensation for Special Groups 45 – 54

9 Human Resource Accounting (HRA) 55 – 60

10 Recent Trends 61 – 73

Unit IV: Legal and Ethical Issues in Compensation

11 Legal Framework of Compensation in India 74 – 86

12 Pay Commissions 87 – 96

Case Studies 97 – 103

References 104

Unit ICompensation Plans and HR Professionals

CHAPTER

1

MeaningToday, to remain competitive, companies need to develop the

reward packages that satisfy the employees. These reward packages arethe combination of monetary as well as non-monetary rewards. Themain objective of working on the reward packages is to attract, motivateand retain employees. The success of a pay system depends on thelinking of organisational objectives and strategies to compensation sothat individuals could be encouraged to work in a manner which willgain maximum benefits for the company and stakeholders. The effectivereward approach to pay depends on the interest, cost, needs andexpectations of the employees and employers.

Total Rewards

BenefitsPerformance and

TalentManagement

Compensation

Base Pay:Wages, Salaries

Variable Pay:Bonuses, Incentives,

Stock Options

1. Health/MedicalInsurance

2. Life/DisabilityInsurance

3. RetirementPension Plans

4. EducationalAssistance

5. Work-life Support

1. PerformanceAppraisals

2. Goal Setting3. Training4. Human Resource

Development5. Career and

Succession Planing

Compensation Plans

2 Finance for HR Professionals and Compensation Management

One of the most difficult functions of personnel management isthat of determining the monetary compensation. The term compensationmainly refers to a systematic approach to providing monetary value toemployees in exchange for work performed. Compensation may achieveseveral purposes assisting in recruitment, job performance and jobsatisfaction. Compensation could be more clearly expressed as thepackage in the form of a financial reward offered to an employee – inthe form of wages, salaries, bonus, commission and other indirectmonetary benefits offered to an employee for the services performed bythem. Compensation encompasses all rewards or payments – tangible orintangible, monetary or non-monetary and physical and psychological –that an organisation provides to its employees on exchange for the workdone.

Objectives of Compensation PlansThe compensation programme is formulated by every organisation.

Even a company with handful of employees will also formulate thecompensation plan. While designing the compensation programme, it isvery important to consider various factors which could affect itsimplementation. Any compensation programme must satisfy three basicobjectives. They are:

To attract the sufficient number of qualified candidates so thatthe best could be selected.

To retain the efficient employees so that the turnover andresource productivity could be enhanced.

To motivate the employees to perform to the fullest of theircapabilities.

Patton suggested that, in compensation policy, there are sevencriteria for effectiveness. Compensation should be:

1. Adequate: The compensation should meet the minimal level asset by government, union and managerial positions.

2. Equitable: The organisation needs to ensure that every personshould be paid fairly, in line with his or her effort, abilities andtraining.

3. Balanced: The pay, benefits and rewards should provide areasonable total reward package.

Compensation Plans 3

4. Cost-effective: It is necessary for the organisation to ensurethat the reward should not be too excessive, considering towhat an organisation can afford to pay.

5. Secure: Pay should be enough to help an employee feelsecured and should help him in satisfying his basic needs.

6. Incentive providing: A compensation plan should consider thedifferent incentives which will motivate employee to performbest at work.

7. Acceptable to employees: It is important that thecompensation plan should be acceptable to the employees. Atleast, it should be enough to satisfy their basic requirements.

Role of HR in Compensation PlansThe term human resources implies that people have the capabilities

that drives organisational performance along with other resources likemachinery, money, materials and information. Human resourcemanagement is designing management systems to ensure that humantalent is used effectively and efficiently to accomplish the organisationgoals. HR professionals perform variety of roles. They performfunctions at strategic level, EEO (Equal Employment Opportunity),staffing, ensures employee and labour relations with management, riskmanagement and worker participation, rewards and compensation, talentmanagement, etc. The focus of study at this stage is on the role of HRprofessionals in compensation management.

Following are the roles performed by a HR professional:1. Develop a programme outline: As a part of compensation

plan, a HR professional will design a programme outline whichvery clearly will indicate the objective of the compensationprogramme. They should clearly prescribe the process of how aparticular compensation strategy will be implemented orexecuted by the organisation. The objectives will also considerthe budget allotted for a particular financial year oncompensation and rewards.

2. Develop a compensation philosophy: Compensationphilosophies can be developed considering two philosophy:(i) entitlement philosophy and (ii) performance philosophy.The entitlement philosophy assumes that individuals who have


worked another year are entitled to pay increases, with littleregard for performance differences. While performancephilosophy assume that compensation changes, if performancechanges. Organisations working under this philosophy do notguarantee additional or increased compensation simply forcompleting another year of service.

3. Conduct a job analysis of all positions: One of the mostimportant functions performed by the HR professional is to dothe job analysis of all the positions in a hierarchy. HRexecutives gathers information from the senior departmentalheads of marketing, finance, sales, administration, productionand other appropriate departments to determine theorganisational structure and primary functions of each.Interviewing the department managers and the employees whoactually executes it will be helpful in determining the specificjob functions. Develop a model of job descriptions which willhelp in better evaluation of job.

4. Job evaluation: Job evaluation aims to determine a job’srelative worth. The job evaluation is a formal and systematiccomparison of jobs to determine the worth of one job relativeto another. Rank the jobs within each senior vice president’sand manager’s department, and then rank jobs between andamong departments. HR professional verifies the ranking bycomparing the industry market data and prepares the flowchartof all ranks for each department for easy assessment andinterpretation of job.

5. Determine job grades: After job evaluation, jobs are furtherclassified into job grades by establishing various levels likesenior, junior, intermediate and beginners. HR executives atthis stage also determine the number of pay grades, ormonetary range of a position at a particular level, within eachdepartment.

6. Determine an appropriate salary structure: Job gradinghelps in classification of jobs which could further be helpfuldesigning a salary structure. Various components of a salarystructure is analysed with the market rates and company’sphilosophy. If it gets satisfied, then the compensation


committee reviews it, makes adjustments if required and goesfor further approval from top level management.

7. To obtain top executives’ approval of the basic salaryprogramme: After getting approval from HR committee, HRdepartment develops and presents the cost impact studies thatproject the expense of bringing the present staff upto theproposed levels or adding any compensation benefits into thepresent salary structure.

8. Communicate the final programme to employees andmanagers: Once the salary structure is approved and finalizedby compensation committee, HR Executives develop a plan forcommunicating the new programme to employees using slideshows or movies, literature, handouts, etc.; make presentationsto managers and employees; implement the programme; designand develop detailed systems, procedures and forms; work withHR information systems staff to establish effectiveimplementation procedures, to develop appropriate data inputforms, and to create effective monitoring reports for seniormanagers; and execute the compensation programme.

9. Monitor the programme: Organisation’s objective ofeffective compensation plan is to motivate employees to givetheir best at work. HR monitors feedback from managers, makechanges where necessary, find flaws or problems in theprogramme and adjust or modify where necessary.

Types of CompensationCompensation to an employee could be direct or indirect. In direct

compensation, the employee gets rewards which are tangible. Employerprovides monetary rewards for the work done. While in case of indirectcompensation, the employer will praise the employee for the work done.Any psychological or social forms of rewards are called as intrinsicrewards or indirect compensation. Extrinsic reward mainly comprised ofboth monetary and non-monetary rewards.


Compensation

Direct Compensation(Financial)

Indirect Compensation(Non-financial)

Base Pay andVariable Pay Benefits

1. Base Pay: The base pay is the basic compensation which anemployee receives in the form of a wage or a salary. It variesfrom organisation to organisation to decide whether to paybasic pay on hourly basis or salaried. Depending on the natureof work, the category is decided. Hourly pay is based on time.Hourly paid pay is the wages which are calculated on the basisof time worked. While salaries are paid to the employeesirrespective of the number of hours worked, base pays are alsomatched closely to the competition. It also considersorganisation’s ability to pay and the quality of talent to be hired.Base pay acts as a base to the variable pay.

2. Variable Pay: Another form of direct compensation isvariable pay. The variable is paid to an individual or a team forthe outstanding organisational performance. The variable paycould be paid by the organisation in the form of bonuses orESOPs (employee stock options). A variable pay will alwaysbe linked to employee or team performances. Therefore, it isflexible and links to the future of the firm and the employee ina positive manner.

3. Benefits: The indirect form of compensation is benefits.Benefits mainly comprised of heath benefits and fringe benefits(vacation pay, health insurance, etc). The benefits areregardless of the performances. It is the tangible value receivedwithout receiving cash.

Factors Influencing CompensationThough a considerable amount of care is taken while designing a

compensation plan, but still there are various factors which influence the


compensation and pay policies. These factors could be classified intoexternal factors and internal factors. External factors are those factorswhich are outside the organisation and have uncontrollable factors.While internal factors are the factors which are inside the organisationand are controllable, they can be changed as and when the externalfactors changes.

External Factors Influencing Compensation1. Demand and supply: A wage or a salary is the price paid for

the services performed by the people. The firm deserves theseservices and therefore, it is desirable that they must pay theprice which will help to attract, retain and satisfy an individualworking for the organisation. The compensation is regulated bythe forces such as demand and supply. Pay may be higher iffew skilled employees are available. Not only this, but thedemand for highly skilled and qualified employee will attracthigh salaries. While in reverse situation, it could be lower.

2. Economic conditions and compensation: The industryeconomic condition also affects the compensation. More thecompetitive industry, the less able the organisation is to payhigher wages. The productivity could also help in higher wages.Productivity can be increased through various means like usingadvanced technology, training, efficient operating methods, etc.

3. Government influences and compensation: The governmentaffects the compensation plans directly. Any changes in wageguidelines could affect the compensation plan. At differentlevels, government have very specific things to say aboutwages and salaries. Equal pay wages, hourly wage regulations,minimum wage, overtime pay, child labour, etc. are amendedtime and again to do justice to the services given by theemployee. And at the same time, employer’s objective is alsoconsidered when policies related to wages and salaries aredesigned.

4. Union influences and compensation: Unions have influencedcompensation plans of the organisation many a times in thepast. Unions have an effect whether or not the organisation’semployees are unionised. The union demands for a higher


wages when they are aware of the ability of the organisation topay.

Internal Factors Influencing Compensation1. Labour budget: It mainly identifies the amount of money

available for annual employee compensation. A firm’s budgetgenerally reflects the entire amount allocated to a particulardivision or a unit. It is dependent on the external influence.Any change could lead to change in labour budget.

2. Motivation and compensation: A well designed compensationplan will motivate employees to contribute to the best of theirabilities. Motivation is the inner state that energises humangoal oriented behaviour. Since different things motivatedifferent individuals, this makes designing of compensationplan complicated and difficult. It is, therefore, important toanalyse the employee satisfaction and productivity whiledeciding on the compensation plan.

Questions1. What do you understand by Compensation Plan? Discuss the

different types of compensation plans.2. Mention various factors influencing the compensation planning

of any organisation.3. What is the role of HR professional in compensation planning?4. Write notes on:

(a) Financial Compensation(b) Non-financial Compensation(c) Base Pay(d) Variable Pay

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