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COMPENSATION AND BENEFITS ADMINISTRATION

COMPENSATION AND BENEFITS ADMINSTRATION Employee compensation refers to all forms of pay or

rewards going to employees and arising from their employment. It has two main components: direct financial payments( in the form of wages, salaries, incentives, commissions and bonuses) and indirect payments( in the form of financial benefits like employer-paid insurance and vacations).The components are usually as follows,

• Base pay : It is the basic compensation an employee gets, usually as a wage or salary.

• Variable pay : It is the compensation linked directly to performance accomplishments ( bonuses, incentives, stock options ,etc).

• Benefits : These are indirect rewards given to an employee or a group of employees as a part of organizational membership

( health insurance, vacation pay, retirement pension, etc)

Compensation Management• Compensation

systems are designed keeping in minds the strategic goals and business objectives.

• Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities

COMPONENTS OF COMPENSATION

DIRECT COMPONENTS : Direct compensation refers to monetary benefits

offered and provided to employees in return of the services they provide to the organization.

BASE PAY : The fixed pay an employee receives on a regular basis.

PAY INCENTIVES : Programs designed to reward employees for good performance. These may include bonuses, profit sharing, merit pay, merchandise incentives, gift certificates, group travel, etc

COMPONENTS OF COMPENSATION.

INCENTIVES Under this topic ,we shall discuss some popular

incentive plans. Individual incentive programs give performance- based pay to individual employees.

Piecework Plans : Piecework is the oldest incentive plan and still the

most commonly used. Pay is tied directly to what the worker produces. The person is paid a “piece- rate” for each unit he or she produces.

INCENTIVES Incentives for managers and Executives : Managers and executives play a central role in

influencing divisional and corporate profitability and thus most firms put considerable thought into how to reward them.

For example, a recent Mercer Consultants survey found that the recent average CEO pay mix was 16% salary,22% bonus and 62% long-term incentives. Employers generally pay out bonus and short term incentive awards in cash. Long-term incentive more often take the form of company stock options.

INCENTIVES• Stock Options : A stock option is the right to

purchase a specific number of shares of the company stock at a specific price during a period of time. The firm’s profitability and growth affects its stock price and because the executive can affect these factors, the stock options supposedly is an incentive.

• Incentives for sales people : Most companies pay their salespeople a combination of salary and commissions, usually with a sizable salary component. Typical is a 70% base salary and 30% incentive mix.

INCENTIVES• Non-tangible and recognition based awards : Recognition is one of several types of non-tangible

incentives.o Recognition program refers to more formal

manager-employee exchanges such as employee-of-the month programs.

o Social recognition program refers to more informal manager-employee exchanges such as praise, approval or expressions of job well-done. The most used rewards to motivate employees were : employee recognition, gift certificates, special events, cash awards, merchandise incentives, email or print communications, training programs, individual travels, group travels, etc

INCENTIVES Scanlon Plan : One of the earliest Gain

sharing Plans

The Scanlon plan is an incentive plan developed in 1937 by Joseph Scanlon, a United Steel Workers Union official. It is one of the many gain sharing plans, the aims of which are to encourage improved employee productivity by sharing resulting financial gains with employees.

The Scanlon plan is remarkably progressive, considering that it is now about 70 years old.

Scanlon Plan Scanlon plans have five basic features,1. The first is Scanlon’s philosophy of cooperation.

This philosophy assumes that managers and workers must rid themselves of the ‘us’ and ‘them’ attitudes that normally hampers the development of a sense of ownership of the company.

2. The second feature is what practitioners call identity. This means to focus employee involvement, the company must clearly articulate its mission or purpose and employees must understand how the business operates in terms of customers, prices and costs.

Scanlon Plan3. Competence is a third basic feature. This

suggests careful selection and training of employees.

4. The fourth feature of the plan is the involvement system. Employees present improvement suggestions to the appropriate departmental–level committees, which transmit valuable ones to the executive- level committee.

5. The fifth element is the sharing of benefits formula. If a suggestion is implemented and successful, all employees usually share in 75% of the savings.

Gain sharing Plans Gain sharing plan is an incentive plan that

engages employees in a common effort to achieve productivity objectives and share the gains.

Implementing a Gain sharing plan :1. Establish general plan objectives, such as

boosting productivity or lowering labor costs.2. Choose specific performance measures. For eg,

use productivity measures such as labor hours per unit produced or financial measures like return on investments etc.

3. Decide on the funding formula. What portion of the gains will the employee receive?

Gain sharing Plans 4. Decide on a method of dividing and distributing

the employees’ share of the gains. 5. Choose the payment format. 6. Decide how often to pay bonus.7. Develop involvement plan. The most common

are steering committee, update meetings, training programmes etc.

8. Implement the plan.

INCENTIVES• Merit pay : or a merit raise is any salary increase

the firm awards to an individual employee based on his individual performance. It is different from a bonus in that it is usually becomes part of the employee’s salary whereas a bonus is a one-time payment.

• The annual bonus : Plans that are designed to motivate short term performance of managers and are tied to company profitability.

• Earnings- at –risk pay plans : The basic characteristic of this plan is that some portion of the employees base salary is at risk.

INCENTIVES

• Team based pay-for–performance plans :These team based pay plans normally reward all team members equally, based on group outcomes.

Advantages of team-based pay-for-

performance : When properly designed, team based incentives

have two major advantages: They foster group cohesiveness They aid performance measurement

INCENTIVES Disadvantages of Team – Based Pay-for-

Performance Plans Possible lack of fit with individualistic cultural values Because most U.S workers expect to be recognized for

their personal contributions, they may not react well to an incentive system in which individual efforts take a back seat to the group effort.

The free- riding effect : In any group, some individuals put in more effort than

others. In addition, ability levels differ from one person to the next. Those who contribute little to the team-either because of low effort or limited ability are free riders.

INDIRECT COMPENSATION INDIRECT COMPONENTS : Indirect compensation refers to benefits offered

and provided to employees in lieu of the services provided by them to the organization.

BENEFITS : Indirect financial and non-financial payments, employees receive for continuing their employment with the Company.

INDIRECT COMPENSATION

BENEFIT ADMINISTRATION Benefits represent an important part of just about

every employee’s pay. Benefits are indirect monetary and non-monetary

payments an employee receives for continuing to work for the Company.

Pay for Time not worked : Also known as ‘Supplemental pay benefits”, it is one of an employer’s most expensive benefits because of all the time off that employees receive. These include holidays, vacations, military duty, sick leave, sabbaticals, unemployment insurance payments for laid- off or terminated employees.

BENEFIT ADMINISTRATION• Vacations and Holidays : Most firms offer vacation

leave benefits. Most firms are moving to a somewhat more flexible vacation leave approach.

• Sick leave : provides pay to employees when they are out of work because of illness. The sick days often accumulate at the rate of approximately 1 day per month of service. Most sick leave policies grant full pay for a specified number of permissible sick days, usually up to about 12 per year. To prevent misuse of sick leave, following measures are taken,

Many firms use pooled paid leave plans. Some firms buy back unused sick leave day not used. Cash prizes Aggressive investigation

BENEFIT ADMINISTRATION• Severance pay : A one-time payment employers provide

when terminating an employee. Some firms provide ‘bridge’ severance pay by keeping

employees (especially managers) on the payroll for several months, until they find new jobs.

It is common to award severance pay as part of a reduction in workforce.

It is somewhat less common to award it when dismissing someone for poor performance, when employees quit or are fired for cause.

It is a humanitarian gesture as well as good public relations Severance pay is also given when employment is

terminated by the Company without giving sufficient notice. Severance pay serves as a shield from employee initiated

litigations.

BENEFIT ADMINISTRATION• Unemployment insurance : All states have

unemployment insurance or compensation acts, which provide for weekly benefits if a person is unable to work through some fault other than his or her own.

• Worker’s compensation - provides income and medical benefits to work related accident victims or their dependents regardless of fault.

• Hospitalization, Medical and Disability Insurance Most employers offer their employees some type of hospitalization, medical and prescription insurance.

• Life Insurance : Employees can usually obtain insurance plans at lower rates in a group plan.

BENEFIT ADMINISTRATION• Welfare and recreational facilities : Credit societies Consumer stores Housing Welfare associations Holiday homes Educational facilities Transportation Club memberships Social gatherings

BENEFIT ADMINISTRATION• Old age and retirement benefits : Employers provide some benefits to the employees after

retirement and during old age with a view to create a feeling of security about the old age.

Provident fund : The Employee’s Provident Fund, Family Pension fund and Deposit Linked Insurance Act 1952,provides for the institution of Provident Fund. This provides security to the employees and their dependants during post retirement life. Both the employee and employer contribute to the fund. The employees on attaining 15 years of membership are eligible for 100% of the contributions with interest.

Medical benefits : Some organizations provide medical benefits to their employees and their family members. Health insurance policies are also made available by organizations.

BENEFIT ADMINISTRATION Pension : Pensions provide income to individuals in their

retirement. The pension can be either contributory or non-contributory. The employee contributes to the contributory pension plan while the employer makes all the contributions to the noncontributory pension plan.

Gratuity : This is another type of retirement benefit to be provided to an employee either on retirement or in case of a physical disability and to the dependents of the deceased employee. The Payment of Gratuity Act 1972 is applicable to the establishments in the entire country. The gratuity payable to an employee shall be at the rate of 15 days wage for every completed year of service. Here the wage means the average of the basic pay last drawn by the employee. The maximum amount of gratuity payable to an employee shall not exceed 20 months wage.

NEED FOR A SOUND SALARY ADMINISTRATION

From the employee’s perspective :

An employee paycheck is certainly important for its purchasing power.

In most societies, a person’s earnings also serve as an indicator of power and prestige and are associated with feelings of self-worth.

In a nutshell, compensation affects a person economically, sociologically and psychologically.

NEED FOR SOUND SALARY ADMINISTRATION From an organization’s perspective :

Attract Talent : Compensation administration should be competitive and well administered to attract good talent.

Retain Talent : Compensation can be a very strong influence on employee retention.

Comply with legal aspects : A sound salary administration system should cater for all legal formalities and rules.

Ensure equity of pay: Pay should be equal the worth of a job. Similar jobs should get similar pay. Likewise more qualified people should get better salaries.

EQUITY THEORY

Adam’s equity theory emphasizes on equity in pay structure of employees remuneration. The remuneration system needs to meet three types of equity : internal ,external and individual. These perceptions of equity directly impact motivation, commitment and performance on job.

Internal equity : involves perceived fairness of pay differentials among different jobs within an organization. Employees should feel that the pay differentials among jobs are fair, given the corresponding differences in job responsibilities.

EQUITY THEORY External equity : involves employees perception of

the fairness of the remuneration relative to those outside the organization. What competitors pay to similar jobs will have its impact on employee motivation, commitment and performance.

Individual equity : refers to the perceived fairness of individual pay decisions. It is based on, the value to the institution ,of specific people rather than of the job group, position title or class to which they belong. It refers to the fairness of an individual’s pay as compared with what his or her co-workers are earning for the same or very similar jobs within the Company, based on each individual’s performance.

NEED FOR SOUND SALARY ADMINISTRATION

Encourages desired behavior : A sound compensation system should encourage loyalty, commitment and motivation in the employees. Also this should encourage risk taking, initiative attitudes in them for operational improvements.

Control costs : An effective compensation system, ensures that workers are neither underpaid nor overpaid.

Performance linked pays are very strong motivators.

FACTORS AFFECTING WAGE/SALARY LEVELS.

A number of factors influence the remuneration payable to employees. They can be categorized into (a) external and (b) internal factors.

EXTERNAL FACTORS : Labor Market: Demand for and supply of labor

influence wage and salary fixation. A low wage may be fixed when the supply of labor exceeds the demand for it and vice-versa. The going rate system involves fixing wage/salary in tune with what is paid by different units of an industry in a locality.

FACTORS AFFECTING WAGE/SALARY LEVELS. Cost of living : A rise in the cost of living is sought

to be compensated by payment of dearness allowance, basic pay to remain undisturbed. Many Companies include an escalatory clause in their wage agreements in terms of which dearness allowance increases or decreases depending upon the movement of consumer price index (CPI).

Labor Unions : The presence or absence of labor organizations often determine the quantum of wages paid to employees. The employees of strongly unionized companies have no freedom in wage and salary fixation. They are forced to yield to the pressure of labor representative in determining and revising pay scales.

FACTORS AFFECTING WAGE/SALARY LEVELS.

State Regulations : We have a plethora of labor laws at the central as well as at the state levels. Some of the laws which have a bearing on employee remuneration are the Payment of wages Act 1936; the Minimum Wages Act1948;The Payment of Bonus Act 1965,etc.

With regard to managerial compensation, there is the Companies act1956,which puts a cap on salary and perquisite of managers.

Wages and allowances of Central and State government employees are determined through the Pay Commissions appointed by the government.

FACTORS AFFECTING WAGE/SALARY LEVELS.• The nature of job : Jobs vary greatly in their

difficulty, complexity and challenge. • Employee knowledge, skills, abilities,

competency levels ,education and experience : This also includes the employees experience levels, education, level of skills, and set of competencies.

• Company’s ability to pay : High profit levels enable Companies to pay higher salaries. Likewise, multinational companies also pay relatively high salaries due to their earning power.

• Employee productivity/performance : Variable pays are often linked with worker ‘s productivity or employee performance.

FACTORS AFFECTING WAGE/SALARY LEVELS.

• Training ,certification, licenses : Training refers to a specialized course of

instruction outside the realm of recognized academic degree programs

Certification refers to a specialized course of study resulting in a certificate upon successful completion. (eg. CPA- Certified Professional accountant)

A license is a credential required by law to practice one’s occupation.( Doctors, nurses,etc)

WAGE /SALARY

The term salary is derived from the Latin word “Salarium” which means salt money paid to soldiers.

According to the Oxford Dictionary ,salary means fixed payment made by the employer at regular intervals usually monthly or quarterly to a person doing other than manual or mechanical work.

The word wage is defined by Oxford Dictionary, as an amount paid at regular intervals especially by a day or two or a month during which the workman or servants is at employers disposal.

COMPONENTS OF SALARY

• BASIC PAY - Pay is the first and foremost important component of salary. The pay is given in two ways, one with a pay scale where the annual increments and periodical efficiency bars are mentioned.

For example, Rs1500-75-2100-100-2900-EB-150-3500 is a scale in which one gets annual increments of Rs.75/- per annum for 8 years in this initial pay and Rs.100 in the next 8 years with an efficiency bar at the pay of Rs2900/- which by crossing he will have an increments of Rs150/- for the next 4 years.

COMPONENTS OF SALARY• DEAR ALLOWANCE : The employees are also paid dearness allowances

with a view to meet the rising prices due to inflation. The dearness allowance is fixed based on price index worked out by the government.

• City Compensatory Allowance : It is generally believed that people living in

metropolitan and large cities will have to incur more expenditure, therefore to compensate the high cost of living ,a CCA is paid to the officers based on the city they live in.

COMPONENTS OF SALARY• HOUSE RENT ALLOWANCE : Officers and employees are entitled to HRA since

they are supposed to pay higher rates of rent for houses in towns and cities, the rates of HRA vary from 5% to 20% of the pay of the employee.

• Special pay : Employees and officers who are assigned some

special duties and function, apart from their normal duties are paid a fixed special pay as compensation for the extra work.

Components of Monthly Payroll of an Employee

Compensation Model

The Compensation model should be designed ,keeping the following three elements in mind ,i.e.  •Management Strategy•Compensation Plan Design•Performance

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COMPENSATION MODEL

ManagementStrategy &Objectives

Compensation plan design•Job analysis

•Job description•Job evaluation

•Labor market survey

PERFORMANCE•Performance appraisal

•Performance management

WAGE POLICY From the employee point of view wages

determine his standard of living. Wage policy is an important issue and therefore the Constitution of India guaranteed “ equal Pay for equal work” for both men and women (Article 39) and reiterated that the State must endeavour to secure for all workers a living wage and conditions of work which ensure a decent standard of life( Article 43).

WAGE DIFFERENTIALS Wage differ in different employments or

occupations, industries and localities, and also between persons in the same employment or

grade. This is referred to as occupational wage differentials.

REASONS FOR WAGE DIFFERENTIALS : Interpersonal differentials : Differentials in

sex, skills, age, knowledge, experience. Inter-occupational differentials : varying

requirements of skill, knowledge, demand-supply situation.

WAGE DIFFERENTIALS

Inter-area differentials : cost of living, ability of employers to pay, demand and supply situation, extent of unionization.

Inter-firm Differentials : Ability of employer to pay, employees’ bargaining power, degree of unionization, skill needs, etc

Advantages of Wage differentials Labour productivity Attracting people to different jobs Maximum utilization of human force Maximization of employee commitment Development of skills and knowledge Regulation of wages

COMPONENTS OF EXECUTIVE COMPENSATION• a) Base salaries: Base salaries for CEOs are typically

determined through competitive “benchmarking,” based primarily on general industry salary surveys and supplemented by detailed analyses of selected industry or market peers.

• b) Short term incentives -Annual Bonus Plans: Virtually every for-profit company offers an annual bonus plan covering its top executives and paid annually based on a single-year’s performance. The bonus is mostly computed using a formula, usually taking into account increases in sales and profits. This bonus although earned in the current period, is distributed over several years.

COMPONENTS OF EXECUTIVE COMPENSATION

• d) Perquisites: Executives are frequently offered a smorgasbord of perquisites not offered to other employees. The logic of these perks is to attract and keep good managers and to motivate them to work hard in the organization’s interests.

• c) Long term incentives -Stock options: Stock options have been common incentive offered to executives. They generally allow executives to purchase, at some time in the future, a specific amount of the company’s stock at a fixed price. Under the assumption that good management will increase the company’s profitability and, therefore, the price of the stock, stock options are viewed as performance based incentives.

COMPONENTS OF EXECUTIVE COMPENSATION

• e) Golden Parachute: A popular benefit that accrued to top executives in the early 80s was the “golden parachute”. It was designed by top executives as a means of protecting themselves if a merger took place. These parachutes provide either a severance salary to the departing executive or a guaranteed position in the newly created (merged) organization.