UNIT-2

HRM
COMPENSATION
 In very simple terms, compensation is the results or
rewards that the employees receive in return for their
work.
 Compensation includes payments like bonuses, profit
sharing, overtime pay, recognition rewards and sales
commission, etc.
 According to Thomas J. Bergmann(1988) compensation
consists of four distinct components: Compensation =
Wage or Salary + Employee benefits +Non-recurring
financial rewards+ Non-pecuniary rewards.
WHAT IS COMPENSATION MANAGEMENT?

 It involves job evaluation, wage & salary survey, profit

sharing &control of pay costs. Two important functions
of compensation ·
 Equity function

 Motivation function

Equity is based on past & current performance &

motivation with which the work has been performed in
the past & current performance.
OBJECTIVES OF COMPENSATION
MANAGEMENT

 1. To Establish a Fair and Equitable Remuneration

 2. To Attract Competent Personnel
 3. To Retain the Present Employees
 4. To Improve Productivity
 5. To Control Cost
 6. To Improve Union Management Relations
 7. To Improve Public Image of the Company
 8. To Improve Job Satisfaction
 9. To Motivate Employees: Employees
 10. Peace of Mind
 11. Increases Self-Confidence
PRINCIPLES OF COMPENSATION

 ➢ Compensation policy should be developed by taking into

consideration of the views of employers, the employees, the
consumers and the community.
 ➢ The compensation policy or wage policy should be clearly
defined to ensure uniform and consistent application.
 ➢ The compensation plan should be matching with overall plans of
the company. Compensation planning should be part and parcel of
financial planning
 ➢ All wage and salary related decisions should be checked against
the standards set in advance in the wage/salary policy
 ➢ To manage compensation related matters adequate
information/data should be developed and stored for future
planning and execution.
 ➢ The compensation policy and programme should be reviewed
and revised periodically in conformity with changing needs.
IMPORTANCE OF COMPENSATION
MANAGEMENT
 It tries to give proper refund to the employees for their
contributions to the organization.
 It discovers a positive control on the efficiency of employees and
motivates them to perform better and achieve the specific
standards.
 It creates a base for happiness and satisfaction of the workforce
that limits the labor turnover and confers a stable organization.
 It enhances the job evaluation process, which in return helps in
setting up more realistic and achievable standards.
 It is designed to abide with the various labor acts and thus does not
result in conflicts between the employee union and the
management. This creates a peaceful relationship between the
employer and the employees.
 It excites an environment of morale, efficiency and cooperation
among the workers and ensures satisfaction to the workers.
COMPONENTS OF COMPENSATION

 Wages and Salary

 Allowances

 Dearness Allowance

 House Rent Allowance

 City Compensatory Allowance

 Transport Allowance/Conveyance Allowance

 Incentives and Performance Based Pay

 Fringe Benefits/Perquisites
TYPES OF COMPENSATIONS

 Direct /Base Compensation

 Indirect /Supplementary
DIRECT /BASE COMPENSATION
INDIRECT /SUPPLEMENTARY
FACTORS AFFECTING EMPLOYEE
COMPENSATION
THEORIES RELATED TO
COMPENSATION MANAGEMENT
 1. Traditional Theory of Wage Determination
 2. Theory of Negotiated Wages

 3. Subsistence Theory

 4. Wage Fund Theory

 5. Surplus Value Theory

 6. Residual Claimant Theory

 7. Marginal Productivity Theory

 8. Bargaining Theory of wages

 9. Behavioral Theory of Wages

 10. Recognition and Rewards

COMPENSATION PLAN – 7 MAJOR STEPS IN
DESIGNING A COMPENSATION PLAN

 1. Create a compensation committee

 2. Develop or update job descriptions

 3. Conduct an internal equity analysis

 4. Conduct an external market analysis

 5. Design a salary structure

 6. Conduct a comparative ratio analysis

 7. Develop administration policies

CHALLENGES OF COMPENSATION
MANAGEMENT
 Multiplicity of Compensation system
 Structural Inflexibility Talent attraction

 Compensation is more than Survey

 Human Capital Perspective

 Cultural Issues

 Increased Benefits

 Lack of Strategic Alignment

INCENTIVES
 Incentives can be defined as monetary or non-monetary
reward offered to the employees for contributing more
efficiency. Incentive can be extra payment or something
more than the regular salary or wage.
 Incentive acts as a very good stimulator or motivator
because it encourages the employees to improve their
efficiency level and reach the target.
NATURE OF INCENTIVE PAYMENT
 Simple and easy to understand
 Must be discussed with employees before
implementation
 Assist in supervision

 Able to evaluate employee’s performance

 Induce cooperation among the employees

 Encourage workers to perform better

 Acceptable to employee and employer

 Ensure sufficient monetary compensation and

recognition to employees
TYPES OF INCENTIVES
 1. Monetary or Financial Incentives
 2. Non-Monetary/Non-Financial Incentives
MONETARY OR FINANCIAL INCENTIVES

 Pay and allowances

 Profits sharing

 Co-partnership/stock option

 Bonus

 Commission

 Suggestion system

 Productivity linked with wage incentives

 Retirement benefits

 Perks/ fringe Benefits/ perquisites

NON-MONETARY/NON-FINANCIAL INCENTIVES

 Status
 Organizational climate

 Career advancement

 Job enrichment/ assignment of challenging job

 Employee’s recognition

 Job security

 Employee’s participation

 Autonomy/ employee empowerment

TYPES OF INCENTIVE SCHEMES

 1. Individual Incentive (PBR) Schemes

 Taylor’s Differential Piece Rate Plan

 Halsey Premium Plan

 Rowan Premium Plan

 Emersson Efficiency Plan

 2. Group Incentive Schemes

 Profit-sharing

 Co-partnership

 Scanlon Plan

 Priest Man’s Plan

 Employee Stock Ownership Plans (ESOPs)

FRINGE BENEFITS
 The term ‘fringe benefits’ refers to various extra benefits
provided by employers to their employees, in addition to
wages and salaries paid to them. They are also known as
‘sub-wages’ or ‘social charges’ or ‘perquisites other than
wages’ etc.
 Fringe benefits include status (cars, entertainment
facilities, holidays, foreign travel, telephone); security
(insurance, medical facilities, children’s education), and
work benefits (office ac­commodation, secretarial
services, management training, company scholarships
etc.). Key benefits are benefits such as share schemes,
profit sharing, and retirement counselling house
purchase.
OBJECTIVES OF FRINGE BENEFITS
 1. To recruit and retain the talented personnel in the organisation.
 2. To maintain sound industrial relations and avoid unrest in the
organisation.
 3. To identify unsatisfied needs of the employees and convert those
into satisfying needs by utilizing appropriate steps.
 4. To protect social security of the employees during old age by
providing provident fund, gratuity and pension.
 5. To develop a sense of belongingness among employees of the
organisation.
 6. To comply various legislations related with fringe benefits which
are formulated by central and state Government.
 7. To ensure cooperation, loyalty and faithfulness among employees
of the organisation.
 8. To develop Brand Image of the organisation in the eyes of public.
CHARACTERS OF FRINGE BENEFITS
 i. Fringe benefits are supplementary forms of
compensation.
 ii. Such benefits are paid not as incentives but based on
membership of the employees with the organization.
 iii. Benefits are linked to performance; these are
extended as a condition of employment.
 iv. Such benefits raise the standards of living of
employees, therefore, contributes to enrichment of
quality of work life (QWL).
 v. Some of the benefits may be statutory while others
may be voluntary.
IMPORTANCE OF FRINGE BENEFITS FOR
EMPLOYEES

 (i) They enhance the real earnings of the employees and enable
them to save money, which they would, otherwise, have spent in
the absence of these benefits.
 (ii) Many benefits, particularly medical and refreshment facilities,
are conducive to the protection of health of employees and
enhancement of their efficiency.
 iii) Housing accommodation with ancillary amenities and
transport facilities result in saving of time and add to employees’
convenience.
 (iv) Many benefits are made available to the employees’ family
members, which promote congenial family life and strengthen
employees’ motivation.
 (v) Some companies advance loans to their employees on liberal
terms for the purchase of vehicles and household appliances. This
facility also raises the living standards of employees.
IMPORTANCE OF FRINGE BENEFITS
FOR EMPLOYERS
 These benefits generally tend to strengthen employees’
motivation and efficiency resulting in higher production
and reduction of labour cost.
 Provision of these benefits also enhances the prestige of
the company in the community and enables competent
workers to be attracted towards the company.
 In establishments facing chronic problems of unstable
workforce and absenteeism, long-term social security
benefits such as life insurance cover, provident fund and
pension and housing accommodation have proved
effective in reducing their incidence.
PRINCIPLES OF FRINGE BENEFITS
 The benefits should actually satisfy a real need. Employee resist
or are indifferent to any benefits which are not liked by them.
 The benefits should be cost effective and as broad based as pos­
sible.
 These benefits need to be given only after a sound planning has
been made to give them.
 Employees need to be educated about these benefits so that they
can make use of them.
 Employees representative and trade union representative should
be ask to express their wishes before these fringes can be planned
for employees.
 Fringe benefits should be provided to employees on the basis of a
genuine interest in the protection and promotion of their well-
being.
EMPLOYEE ENGAGEMENT
 Employee Engagement can be defined as the level of
commitment and ‘ involvement as employee has towards
his/her organization and its values. ‘It is the degree to
which an employee is emotionally bonded to his/her
organization and passionate about his/her work.’
 Employee engagement, also called work engagement or
worker engagement, is a business management concept.
An “engaged employee” is one who is fully involved in,
and enthusiastic about, his or her work, and thus will act
in a way that furthers their organization’s interests within
the group and without the group.
CONT…
 There are three organizational forces that enhance
employee engagement as follows:
 i. Lower attrition rate

 ii. Better productivity

 iii. Enhanced profitability

NATURE OF EMPLOYEE
ENGAGEMENT
 1. Boosts productivity
 2. Customer satisfaction at its best

 3. A sign of success

 4. Enhances culture
TYPES OF ENGAGEMENT
 Based on the level of commitment, the employees can be
classified into the following three categories –
CONT..
 3 types of employee engagement based on the desired
end result.
 1) Cognitive engagement

 2) Emotional engagement

 3) Physical engagement
DRIVERS OF EMPLOYEE
ENGAGEMENT
 Work/Job Role
 Work Environment/Organization Culture

 Rewards and Recognition

 Learning and Training Opportunities

 Performance Management

 Leadership
BENEFITS OF ENGAGEMENT
 Employee Satisfaction
 Productivity

 Retention & Recruitment

 Innovation

 Profitability
EMPLOYEE EMPOWERMENT
 Empowerment is the process of giving employees in the
organisation the power, authority, responsibility,
resources, freedom to take decisions and solve work
related problems.
 The empowered employee becomes “self-directed” and
“self-controlled”. Empowerment focuses on employees
to make use of their full potential. On the other hand,
empowerment means giving up control on employees
and letting every employee make decisions, set goals,
accomplish results and receive rewards.
 It is a process for helping right person at the right levels
to makes the right decision for the right reasons.
IMPORTANCE OF EMPLOYEE
EMPOWERMENT
 (i) Employee empowerment improves quality of goods
produced by employees.
 (ii) In changing scenario, workers need acceptance of
changes in Operation, methods, techniques, quality of
products and this is possible if organizations practice
employee empowerment.
 (iii) It brings congenial and conducive atmosphere in the
organization to achieve organizational goals.
 (iv) A culture of openness and trust is developed which
establishes healthy relations between supervisors and
employees.
 (v) It helps to create motivated and committed work force
in organization.
EMPLOYEE EMPOWERMENT – TOP 5 BENEFITS

 1. Increased Productivity
 2. Reduced Costs

 3. Improved Quality

 4. Competitive Edge

 5. Better Job Satisfaction and Retention of Employees

TYPES OF EMPLOYEE
EMPOWERMENT
 Type 1. Suggestion Involvement
 Type 2. Job Involvement

 Type 3. High Involvement

EMPLOYEE EMPOWERMENT – DIMENSIONS
AND APPROACHES

 Employees’ empowerment is represented by the

following four dimensions:
 (i) Self-determination

 (ii) Meaningfulness

 (iii) Competence

 (iv) Feeling of impact

APPROACHES TO EFFECTIVE
EMPLOYEE EMPOWERMENT
 Bowen and Lawler have suggested the following five
approaches for empowerment in practice
 (i) Helping employees achieve job mastery

 (ii) Allowing more control

 (iii) Providing successful role models

 (iv)Using social reinforcement and persuasion

 (v) Giving emotional support