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Compensation and
Benefits Administration
Module-7
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Compensation
Is what
employees
receive inexchange for
their
contribution
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Compensation
Pay is a statement of an employee¶s
worth by an employer.
Pay is a perception of one¶s worth by
an employee.
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Total CompensationTotal Compensation
DirectDirect IndirectIndirect
BonusesBonuses
GainsharingGainsharing Security Plans
Pensions
Employee Services Educational assistance Recreational programs
CommissionsCommissions
Wages / SalariesWages / Salaries
Insurance PlansInsurance Plans MedicalMedical DentalDental LifeLife
Time Not WorkedTime Not Worked VacationsVacations BreaksBreaks
HolidaysHolidays
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Objectives
i) Internal Equity:- ensures more
difficult jobs are paid more
ii) External Equity:- ensures that jobs are fairly compensated in
comparison to similar jobs in the job
market
iii) Individual Equity:- ensures equal
pay for equal work i.e. each
individual¶s pay is fair in comparison
to others doing the same jobs
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Common Strategic
Compensation Goals To reward employees¶ past performance
To remain competitive in the labor market
To maintain salary equity amongemployees
To mesh employees¶ future performance
with organizational goals To control the compensation budget
To attract new employees
To reduce unnecessary turnover
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Factors That Influence Compensation
Unionization
Level of
Compensationand
Benefits
Employee¶s
tenure andperformance
Kind of job
performedCost of Living
Management
philosophy
Legal requirementGeographical
location
Labour- or
capital-intensive
Companyprofitability
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Factors Affecting the Wage Mix
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The Bases for Compensation
Hourly Work
± Work paid on an hourly basis.
Piecework ± Work paid according to the number of units
produced.
Salary Workers
± Employees whose compensation is computed
on the basis of weekly, biweekly, or monthly
pay periods.
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The Bases for Compensation
(cont¶d) Nonexempt Employees
± Employees covered by the overtime
provisions
Exempt employees
± Employees who are not covered in the
overtime
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16-10
Compensation Administration
Wage Policy In India
A wage policy offers certain guidelines for determining a wage
structure. The term wage structure refers to various pay scales
showing rages of pay within each grade. Three important elements of
wage policy in India need to be elaborated here
Minimum wage: Wage sufficient to sustain and preserve theefficiency of the worker and offer basic amenities of life
Fair wage: It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as the
productivity of labour, prevailing wage rates, level of national
income and its distribution, the employer¶s capacity to pay etc. Living wage: This is the highest amount of wages proposed by
the government, offering basic amenities of life and satisfying
the social needs of worker.
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Compensation Administration
Simple
Beneficial
Equitable
Guaranteed minimum wage
Balanced
Incentive-oriented
Quality output
Certainty
Cost effective
flexible
Characteristics of a wage payment plan
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Job Evaluation
Job Evaluation
± The systematic process of determining the
relative worth of jobs in order to establish
which jobs should be paid more than others
within an organization.
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Variable Pay Or Pay For PerformanceSystems /Incentive
Here the pay is linked to individual, group or organisational performance.
Employees have to compete and deliver results. Three types of variable
pay are commonly used:
Individual incentives: they link individual effort to pay
Group incentives: they link pay to the overall performance of the
entire group
Organisation-wide incentives: here employees are rewarded on the
basis of the success of the organisation over a specified time period.
Compensation Administration
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Individual Incentive Plans
Compensation Administration
Halsey plan: Here the worker gets a guaranteed wages based on the
time, irrespective of whether the assigned work is completed or not. If
the worker is able to finish the task in less than the standard time, he or
she is entitled to get fifty (in some cases one third) per cent of time
saved at time rate in addition to normal time wages.
Rowan plan: It assures minimum time wages. Bonus is paid on the
basis of time saved. But unlike a fixed percentage , it is calculated thus
Bonus = Time saved/Standard time X Time taken X hourly rate
Gantt task and bonus plan: Here time wages are guaranteed.
Standard time for each task is fixed. Workers, who fail to finish the jobwithin the time limits, get time wages. A worker who reaches the
standard is paid time wage plus bonus at a fixed percentage (20 per
cent)of normal time wages. If a worker exceeds the standards, he is
paid a high piece rate.
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Compensation Administration
Individual Incentive Plans
Bedeaux plan: In this plan every operation is expressed in terms of
standard minutes called as ³B's´ representing one minute. A worker
gets time wages for 100 % performance; ie, finishing the job exactly as
per standards set. If actual performance exceeds the standard
performance in terms of B's then 75% of the wages of time saved is
paid to worker as bonus and 25% is given to the foreman. Haynes manit plan: It is more or less like the bedeaux plan. Here the
bonus is only 50 per cent as against 75 per cent, being paid to the
efficient worker. Of the remaining 50 per cent, 10% goes to the foreman
and the rest to management.
Emerson's efficiency plan: If the worker achieves 67% efficiency, he
gets bonus at a given rate. The rate of bonus increases gradually from
67% to 100%. Above 100% bonus will be at 20% of the basic rate plus
1% for each increase in efficiency.
Accelerate premium bonus plan: Here the premium is paid at varying
rates for increasing efficiency.
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Compensation Administration
Group or Team Based Incentive Plans
Here all team members receive an incentive bonus payment when
production or service standards are met or exceeded. Methods in
this category include Preistman¶s production bonus, Rucker plan,
Scanlon plan, Towne plan and Co partnership. Under co
partnership, the worker gets his usual wages, a share in the profits
of the company and a share in the management of the company as
well.
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Compensation Administration
Organisation Wide Incentive Plans
These plans reward employees on the basis of the success of the
organisation over a specified time period.
Profit sharing: Here the organisation agrees to pay a particular portion
of net profits (given in cash or in the form of shares) to eligible
employees.
Gain sharing: It is based on a mathematical formula that compares a
baseline of performance with actual productivity during a given period.
When productivity exceeds the base line an agreed upon savings is
shared with employees. Unlike profit sharing plans which have deferred
payments, gain sharing plans are current distribution plans. These are
based on individual performance and are distributed on a monthly or
quarterly basis.
Employee stock ownership plan: It provides a mechanism through
which certain eligible employees (based on length of service,
contribution to the department etc) may purchase the stock of the
company at a reduced rate.
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Compensation Administration
Plus points
Empower the employee to participate in the growth of a company as
part owner and get a fair share of the cake.
Helps the company to retain talented employees and make them
committed to the job and the company Better industrial relations, reduced employee turnover, lesser
supervision, are other benefits
Organisation Wide Incentive Plans
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Essentials of a sound incentive plan
Compensation Administration
Guaranteed minimum wages
Simple
Equitable
Economical
Flexible
Supported by workers and unions
Motivating
Prompt payment
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Bonuses
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Compensation Administration
It is an incentive payment granted to a worker at the end of a particular
year, in addition to one¶s normal standard wage.
The Payment of Bonus Act, 1965The Act defines an employee who is covered by it as one earning Rs 2,500 p.m. (w.e.f.1.4.93) basic plus dearness allowance and specifies the formula for calculating the allocablesurplus from which bonus is to be distributed. The minimum bonus to be paid has beenraised from 4 per cent to 8.33 per cent (w.e.f. 25.9.75) and is sought to be linked toincreased productivity in recent times. Through collective bargaining, the workers, throughtheir representative union, can negotiate for more than what the Act provides and get thesame ratified by the government, if necessary. In the absence of such a process, the Actmakes it mandatory to pay bonus to employees (who have worked in the unit for not lessthan 30 working days in a year) following a prescribed formula for calculating the availablesurplus. The available surplus is normally the gross profits for that year after deducting
depreciation, development rebate/investment allowance/ development allowance, direct taxand other sums referred to in Sec. 6 The Act applies to every factory or establishment inwhich 20 or more persons are employed in an accounting year. Currently the position is suchthat even if there is a loss, a minimum bonus needs to be paid treating the same as deficit tobe carried forward and set off against profits in subsequent years (Sec. 15). The Act isproposed to be changed since the amount of bonus, the formula for calculating surplus, andthe set off provisions have all been under serious attack from various quarters.
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Compensation Administration
Fringe Benefits
These are extra benefits provided to employees in addition to the
normal compensation paid in the form of wages or salaries.
Features Supplementary forms of compensation
Paid to all employees
Indirect compensation, since they are not directly related to performance
May be statutory or voluntary
Need for fringe benefits
Employee demands Trade union demands
Employer's preference
A kind of social security
To improve industrial relations
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Requirements for a Sound
Benefits ProgramStrategicStrategic
BenefitsBenefits
PlanningPlanning
Allowing for Allowing for
EmployeeEmployee
InvolvementInvolvement
Benefits for aBenefits for a
DiverseDiverse
WorkforceWorkforce
ProvidingProviding
for for
FlexibilityFlexibility
CommunicatingCommunicating
Employee BenefitsEmployee Benefits
InformationInformation
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Types of Fringe Benefits
Payment for Time not worked
Paid Holidays
Shift Premium Holiday Pay
Paid vacation
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Employee Security
Retrenchment Benefit
Layoff Compensation Welfare and recreational Facilities
Canteens
Consumer storesCredit Societies
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Housing
Employee counseling
Holidays homes Education Facilities
Transportation
Parties and Picnics
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Old and retirement Benefits
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Compensation Administration
Types of Fringe Benefits
Types of Fringe Benefits
Payment for Time Employee Safety and Welfare recreational Old age and
not worked security health facilities retirement
benefits
Hours of Paid Shift Holiday Paidwork holi days premium pay vacation
Retrenchment Lay off
compensation compensation
Safety Workmen¶s Health
measures compensation benefits
Canteens Consumer Credit Housing Legal aid Employee Welfare Hol iday Educational Trans- Part ies &
societies societies counselling o rganisations homes facilities portation picnic
Provident fund
Deposit linked insurance
Gratuity
Medical benefits
Misce-
llaneous
Pension
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