Compensation Management

Amit Sharma Business Analyst B. Tech, MBA, SAP(HR), SHRM|PHR [email protected]

Compensation Management:
Co mpensation is a systematic approach to providing monetary value to employees in exchange for work performed. Co mpensation may achieve several purposes assisting in recruit ment, job performance, and job satisfaction. Co mpensation management, also known as wage and salary administration, remuneration management, o r reward management, is concerned with designing and imp lementing total compensation package. The traditional concept of wage and salary administration emphasized on only determination of wage and salary structures in organizational settings. However, over the passage of time, many more fo rms of co mpensation as discussed earlier, entered the business field wh ich necessitated to take wage and salary administration in co mprehensive way with a suitable change in its nomenclature. Beach has defined wage and salary ad min istration as follows: "Wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organizational problems, development and maintenance of wage structure, establishing rules for administering wages. Wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items"

Components of Compensation system:
The literal meaning of co mpensation is to counter-balance. In the case of human resource management, compensation is referred to as money and other benefits received by an employee for p roviding services to his employer. Money and benefits received may be in different forms -base compensation in money fonn and various benefits, which may be associated with employee's service to the employer like p rovident fund, gratuity, and insurance scheme, and any other payment which the emp loyee receives or benefits he enjoys in lieu of such payment. Cascio has defined compensation as

follows: "Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity” Based on above description of co mpensation, we may identify its various components as follows: Wage and Salary: Wage and salary are the most important component of compensation and these are essential irrespective of the type of organization. Wage is referred to as remuneration to workers particularly, hourly -rated payment. Salary refers to as remuneration paid to white -collar emp loyees including managerial personnel. Wages and salary are paid on the basis of fixed period of time and normally not associated with productivity of an employee at a particular t ime. Incentives: Incentives are the additional payment to emp loyees besides the payment of wages and salaries. Often these are lin ked with productivity, either in terms of higher production or cost saving or both. These incentives may be given on indiv idual basis or group basis. Fringe Benefits: Fringe benefits include such benefits which are provided to the employees either having long -term impact like provident fund, gratuity, pension; or occurrence of certain events like med ical benefits, accident relief, health and life insurance; or facilitation in performance of job like uniforms, Canteens, recreation, etc. Perquisites: These are normally provided to managerial personnel either to facilitate their job performance or to retain them in the organization. Such perquisites include company car, club membership, free residential acco mmodation, paid holiday trips, stock options, etc.

Wages:
According to economic theory, wages are defined broadly as any economic co mpensation paid by the employer to his laborers under some contract for the services rendered by them. In its actual sense which is prevalent in the practice, wages are paid to workers wh ich include basic wages and other allo wances which are lin ked with the wages like dearness allowances, etc. Traditionally, in the absence of any bargaining power possessed by laborers, they did not have any say in the determination of wages paid to them. This has led to the development of several theories of wages such as subsistence theory by Ricardo, wage fund theory by Adam Smith, surplus value theory by Karl Marx, residual claimant theory by Frascis Walker, marginal productivity theory by Philip Wickstted and John Clark, bargaining theory by John Davidson and behavioral theory by James March and Herbert Simon. Each theory tries to exp lain how wages are determined. In the Indian context, soon after the independence, Govern ment of India set up a Co mmittee on Fair Wages in 1948 which has defined various concepts of wages which govern the wage structure in the country specially in those se ctors which can be termed as underpaid and where workers do not have bargaining power through unions. These concepts are: minimu m wage, liv ing wage, and fair wage. Later, the concept of need based min imu m wage was added. Let us have a brief look at these concepts. Minimum Wage: A minimu m wage is one wh ich has to be paid by an employer to his workers irrespective of his ability to pay. According to the above committee,

"Minimum wage is the wage which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the workers. For this purpose, minimum wage must provide some measure o f education, medical requirements and amenities. " Subsequent to the committee's report, Govern ment enacted legal provisions regarding minimu m wages under the Minimu m Wages Act. 1948. This Act does not define the concept of minimu m wages but empowers the Central Govern ment as well as State Govern ments to fix min imu m wages fro m t ime to t ime. Wherever this Act applies, the payment of minimu m wages is mandatory. In 1957, Indian Labor Conference elaborated the concept of fixat ion of minimu m wars wh ich were termed as need-based min imu m wages. For the calculation of wages, the Conference suggested the following guidelines: The standard working class family should be taken to consist of three consumption units for the earner; the earnings of wo men, children and adolescents should be disregarded. The min imu m food requirements should be calculated on the basis of the net intake of 2.700 calories per adult. The clothing requirements should be estimated at a per capita consumption of 18 yards per annum per person. In respect of housing. the norms should be the minimu m rent charged by the Government in any area for houses provided under subsidized housing scheme for low -income g roups. Fuel. Lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimu m wage. Living Wage: Along with the min imu m wage the Co mmittee on Fair Wages has given the concept of living wage which has been defined as follo ws: "A living wage is one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort including education for his children, protection against ill -health, requirements of essential social needs and a measure of insurance against the more important misfortunes including old age. " Living wage is more than the concept of minimu m wage. Such a wage is determined keeping in v iew the national inco me and paying capacity of industrial sector. The Co mmittee also observed that since the national income d id not support the payment of liv ing wage. it should be implemented in three phases. In the initial stage the wages to be paid to the entire working class were to be established and stabilized. In the second phase fair wages were to be established in the community and industry. In the final phase the working class was to be paid the living wage. Fair Wage: The concept of fair wage is lin ked with the capacity of the industry to pay. The Co mmittee has defined fair wage as follows: "Fair wage is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity of the industry to pay. " Thus, fair wage depends on different variab les affecting wage determination. Such factors are labor productivity prevailing wage rates, the level of national inco me and its distribution and the capacity of industry to pay. At present, the concept of fair wages is followed by the most business organizations. Methods of Wage Payment: In devising system of wage determination, the critical question that emerges is whether the wage will be linked to time spent on the workp lace or output achieved during a specified period. This results into two types of wages time wage and

piece wage. These two basic systems have their own relative merits and demerits. So met imes, in order to avoid hardship to employees, a co mbination of these two methods is followed to ensure the payment of minimu m wages. This method is known as balance method. Let us see how these methods work. Time Wage Method: In time wage method, the wage is determined on the basis of time worked wh ich may be hourly, daily, weekly, monthly or any other time base. A worker is paid wage for the time worked irrespective of his o utput during that time. Perhaps, this is the oldest and most prevalent system of wage payment. Merits of Ti me Wage: This method is applied mo re co mmonly because it has certain inherent merits which are as under: There are certain jobs in which output within a specified period is not easily measurable. e.g. The job of a peon. In such a case wage payment is lin ked to time. It is quite easy to understand and calculate the amount of wages to be paid. Thus, even an illiterate worker can understand it. Both employers and workers know well in advance the amount of wages payable and they can adjust their budgets accordingly. It ensures the payment of regular and specific wages which is beneficial fro m social point of v iew. Product/service quality tends to be high as workers are not in hurry to produce more without regard to quality. Demerits o f Ti me Wage: Though adopted more co mmon ly, time wage system suffers fro m a nu mber of d rawbacks and if the workers are not adequately mot ivated for higher performance This system can generate inefficiency in the following ways: Since there is no direct linkage between perfo rmance and wages. Employees tend to take easy approach. This system does not differentiate between efficient and inefficient workers: g radually, inefficiency percolates to efficient wo rkers too. It demot ivates efficient workers for mo re output as they are put at par with inefficient ones. Labor cost of production becomes difficult to determine in advance because wages are not linked to output. Since productivity is not a criterion fo r fixing wages. There is a possibility that wrong employees are placed on the job. Various merits and demerits of time wage system suggest that this system can be followed in some jo bs but not in all. This system is more suitable in the following situations: Where units of output are not measurable precisely like office work. Where individual emp loyees do not have direct control on their outputs like assembly work. Where quality of wo rk is more p ronounced and requires creative imag ination like artistic work. Where mach inery and raw materials are quite sophisticated which require handling with utmost care like processing of precious metals. Where work is of h ighly varied nature and standards of outputs cannot be ascertained like research work. Where workers' unions oppose the introduction of piece rate system. Where supervision is good and the supervisors can estimate a fair day's work. Piece Wage Method: In piece wage method workers are paid wages according to the quantity of output during a specified period. This may be

calculated on the basis of number of units produced or the completion of a job where output is not measurable in terms of individual units. Piece wage method too has its own merits and demerits. Merits of Piece Wage: Piece wage method has the follo wing merits: There is a direct relationship between output and wages which works as a motivat ing factor to workers to produce more. It differentiates efficient and inefficient workers and provides incentives to inefficient workers to become efficient. This is fair and equitable so far as utilizat ion of human resources is concerned. It. requires less supervision if there is in-built system for product quality control. The organization can estimate its cost of production well in advance because wage cost is directly proportional to output. Demerits o f Piece Wage: Piece wage system has the follo wing demerits: There is a problem in fixing piece rate in the absence of any standardized procedure. There is a tendency on the part of the emp loyers to cut piece rate if workers' earn ings are quite high. The method does not ensure minimu m wages as output may be adversely affected by factors beyond control. The product quality and machinery conditions are likely to suffer because workers concentrate more on quantity rather than quality. There may be jealousy and interpersonal conflict among wo rkers because of their uneven earnings at the same workp lace. Trade unions generally oppose this system because of the fear of discrimination among workers based on their working. Various merits and demerits of piece wage system indicate that this system is not suitable for a ll conditions but only to specific conditions which are as follows: Where the output of each individual worker can be measured precisely. Where the quantity of output is a direct result of skills and efforts of individual workers. When the flow of work is regular and wo rk interruptions do not occur. Where production methods are standardized and job is of repetitive nature. Where workmanship is not required. Balance Method: Balance method also known as debt method, is essentially a co mbination of t ime wage and piece wage methods. Under this method, a worker is guaranteed a fixed wage based on time rate with a provision of p iece wage method. Thus, if a worker produces more quantity in a period, usually on weekly or monthly basis, and earns more than his time wage, he is given credit for additional output which is co mpensated in another period in which production quantity falls below the time wage. This method provides a sense of security to a worker so far as his wage earning is concerned. At the same time, he is also motivated to produce more because of inclusion of p iece wage system. This method has its relevance in a workp lace where the work flo w is irregular like docks. Factors Affecting Wages:

On the basis of above discussion, we may summarize the factors affecting wage rates as under: Demand for and supply of labor: Demand and supply conditions of labor have considerable influence on the determination of wage rates. If there is a short supply of labor, the wages may be high whereas if there is no dearth of labor, the wages tend to be low. Labor unions: If the laborers are well o rganized into strong trade unions, their bargaining power would be high and they can demand higher rates of wages. On the other hand, if the laborers are not organized, the management may fix low wages. Cost of living: The cost of living of workers also has a strong influence on the rate of wages. If this factor is not considered, the laborers may not be in a position to make both ends meet and this will affect their efficiency. Hence progressive employers consider this factor also. Prevailing wage rates: Prevailing wages in a part icular industry are also taken into account by the employers while decid ing wage levels for their emp loyees. By considering the prevailing wage level, emp loyers will co me reasonable close to the wage level of co mpetitors, and this will enable them to retain and attract qualified workers to the organizations. Ability to pay: The wage level, to a large extent, is determined by the ability of the enterprise to pay its workers. The ability to pay in turn is determined by the profit-earning capacity of the enterprise. Job requirements: Job requirements are also an important factor affect ing wages. Jobs requiring specialized knowledge or involving much mental o r manual effort are priced higher than those which are light or wh ich do not need any specialized knowledge. State regulation: State regulation is another important factor influencing wage rtes. As the State assumes responsibility fo r safeguarding the interest of citizens, it has to step in to regulate the wage rates of laborers through legislative measures. Increment system: In some o rganizat ions wages automatically increase annually at a prescribed rate without any relation to wo rkers’ performance. In some other organizat ions annual increases based on merit. Thus, the prevailing system of granting increments also affects wages.

Incentives:
‘Incentive’ may be defined as any reward of benefit given to the emp loyee over and above his wage or salary with a v iew to motivating him to excel in his work. Incentives include both monetary as well as non -monetary rewards. A scheme of incentive is a plan to motivate indiv idual or group performance. The following are some o f the defin itions of the term ‘Incentive’: Wage incentives are extra financial motivation. They are designed to stimulate hu man effo rt by rewarding the person, over and above the time rated remunerat ion, for imp rovements in the present or targeted results ” – The National Co mmission on Labor. “It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job ” – Hu mmel and Nic kerson. “It is any formal and announced programme under which the income of an individual, a s mall group, a p lant work force o r all the employees of a firm are part ially or wholly related to some measure of productivity output” – Scott. Need for incentive: It is true that monetary compensation does constitute very important reason for the working of an emp loyee. But this compensation alone cannot bring job satisfaction to the workers. One cannot expect effective performance fro m a worker

who is dissatisfied with its job, even if he is well paid. Socio logists and industrial psychologists also view that the financial aspect is not the only dominant motivating force. Confidence in the management, pride in the job and in firm and concern for the overall good cannot be brought by a bonus. Hence the modern authorities on management science have recognized the need for the provision of incentives to build up good morale. Incentives for work: Incentives can take any form. According to Z. Clark Dickinson the important incentives for work can be listed as follows: Desire for livelihood and fear of want. Desire for approval of master and fear of punishment. Desire for praise and fear of being dismissed. Impulse to activity or joy in work and dislike of inactiv ity. The mo ral co mmand and fear of conscience. Robert E. Salton has mentioned the following nine factors as the Motives for work. Doing something worthwh ile (Good). Trust in leadership. Doing my share (Participation) I count for something (Recognition). A decent living (Fair Wages). A chance to get somewhere (Opportunity). A safe future (Security). Know what’s going on (Co mmunication). Conditions at work (Environment) Classification of Incentives: All forms of incentives can be broadly classified into two kinds namely, Financial Incentives, and Non-financial Incentives. Financial Incentives Financial incentives or pecuniary incentives are the most original of all th e incentives. It is given in the form of money. The financial incentives still form the most important influencing and motivating factor up to a certain limit. Because it is only by virtue of the monetary co mpensation that the workers can satisfy their fun damental needs such as food, clothing, shelter etc. The financial incentives may be either direct or indirect. Direct incentives include wages, bonus and other incentives directly given to the workers in the form of cash. Indirect financial incentives include subsistence allowance expenses, medical expenses etc. Non-financial incentives: Non-financial o r non-pecuniary incentives include all other influences planned or unplanned, which stimulate exertion. Mere monetary incentive cannot help the management in solving all the problems of industrial unrest. Further additional cash wage may also tempt the workers to misuse the money in vices like gambling, drinking etc. Under such circumstances, the nonfinancial incentives have a significant role to play. Such incentives create a healthy atmosphere and change the mental outlook of the workers. They make the working class more stabilized and economically sound. Thus, in short, the workers by virtue of the non-financial incentives are enabled to enjoy a richer and fuller life. Experiences of foreign countries particularly countries like Britain, A merica and Japan have shown that there is

a high degree of positive correlat ion between non-financial benefit schemes and labor productivity. Non-Financial Incentives can take a variety of forms. Some of the popular ones are given below: Job Security: The management must try its best to create a sense of job security. There should be no risk of retrench ment, demotion and termination. Experiences have also shown that the productivity is less in those concerns where workers have no feeling of safe and secure. But it is high in those concerns where they have a feeling of job security. Recognition: Recognition of work is the essence of securing good work. Efficient people would naturally like to get recognition for their skill and excellence in their wo rk. Such recognition can do many things that what a cash reward can do. Of course it is not practicable for the superiors to praise everybody for every thing done by them. But the technique of praise must be practiced as far as possible. Participation: Workers feel more satisfied when they are given an opportunity to raise their voice in hand ling the affairs of the enterprise. Since they actually take part in the decision-making their co-operation is assured. Sincere Interest i n Subordinates as Individual Persons: The workers must be made to feel pride in their job. Various techniques can be e mployed to develop pride to work. Food products, dynamic leadership, fair treat ment, ethical conduct etc. can effectively stimulate the workers ’ pride in their job and in the firm. Pride in job: The workers must be made to feel pride in their job. Various techniques can be employed to develop pride to work. Food products, dynamic leadership, fair treat ment, ethical conduct etc. can effectively stimulate the workers pride in their job and in the firm. Delegation of Responsibility: Delegation of rights and responsibilities to execute a given task often proves to be a strong motivating factor. By delegation the superior trusts his workers and stimulates them to show better results. Other Incentives: Other incentives like qu ick p ro motion, provisions of facilit ies for develop ment and training, provision of labor welfare amen ities etc. also have a significant ro le to play in motivating the employees. Merits of Incentives: The following are the advantages derived by providing incentives to employees: Higher output: By providing incentives to his employees, the employer is able to induce them to work better. Th is leads to higher output. Greater profits: Needless to say, higher output results in greater profits for the business. This happens in two ways. First, the cost per unit becomes less and second, the enterprise is able to keep the selling price lo w and this result in greater sales. No problem of idle time: In an organizat ion where no proper incentives are available for the workers, the tendency will be to wh ile away the time. When suitable incentives are available, the workers become time conscious. They begin to see every minute in terms of money. Supervision does not pose any problem: When suitable incentives are available, the workers become duty conscious. The need for close supervision, thus, does not arise. Efficient workers are able to earn more: Such of those workers who are h ighly efficient are able to earn more by way of perfo rmance bonus, higher commission

and so on. Possible to identify inefficient and dull workers: If, in spite of the incentive schemes, some workers are ab le to earn only their normal wage, it should mean that they are basically dull. The emp loyer, therefo re, has to decide whether to retain them or subject them to rigorous training. Rate of labor turnover is bound to be low: If adequate incentives are available to the wo rkers, they may not have a feeling of dissatisfaction. Such workers are sure to have greater work co mmit ment and therefore may not leave the org anization. The rate of labor turnover, as a result, is bound to be low. Reduction in complaints and grievances: As the organization makes available suitable incentives to the workers, they may not have anything to complain about. This leads to reduction in complaints and grievances. Problems arising out of incentives: The following problems are bound to arise while implement ing an incentive plan: Quality of work may suffer: The workers, those in the production department in particu lar, may give undue importance to the quantity of output produced neglecting the quality of output. Such a problem can be overco me only if the organization has a perfect system of quality control. Inter-personnel relationships may suffer: Only those employees who are really efficient will be benefited out of incentives. This may pro mote ill feelings among the emp loyees of an organization. Wear and tear of machines may be more: As the employees are keen on increasing the output all the time, they may handle the mach ines carelessly. This increases the wear and tear of machines. Health of the workers may get affected: Some workers tend to overwork in order to earn more and this may affect their health. Increase in accidents: There is always a preference to step up output disregarding even safety regulations and this may increase the rate of accidents in the workplace. Increase in paper work: Proper ad ministration of any incentive scheme involves lot of paper work. It necessitates the maintenance of proper records and books. Requirements of a sound incentive plan: A good incentive plan shall fulfill the following requirements: Trust and confidence: The success of any incentive plan depends on the existence of an atmosphere of trust and confidence between the workers and the management. In the absence of such an atmosphere, the workers may resist any such proposal by the management. Consensus required: The management should not take a unilateral decision while evolving an incentive scheme. Consensus between the workers and the management is necessary for the success of the plan. Assured minimum wage: Payment to any worker should not be totally related to his performance. Every worker should be assured of a minimu m wave notwithstanding performance. On ly then the workers would have a sense of security. No scope for bias or favoritism: The standards set under the incentive plan should be based on objective analysis. It should not expect too much out of the

emp loyee nor should it give scope for bias or favoritis m. Simple to operate: The incentive plan should not involve tedious calculations. It should be so simp le that the worker will be in a position to work out his total earnings himself. Beneficial to both the workers and the ma nagement: The incentive plan should be beneficial to both the workers and the management. Fro m the management's point of view, it should be cost effective. Fro m the workers' point of view, it should offer return, at a rate higher than the normal rate of wages, for the extra efforts made by them. Sound system of evaluation: A perfect system of evaluating the employee’s performance should be created in the organizat ion. The results of evaluation should be made known to the emp loyees at the earliest. Redressing grievances: Grievances and complaints are bound to arise whenever any incentive plan is in vogue in the organization. Proper mach inery should be installed for the quick handling of all such complaints. Review: The progress of the incentive scheme should be periodically reviewed. On ly then it would be possible to notice and remove defects, if any, in the plan.

Fringe Benefits:
The fri nge benefits are categorized as follows: Payment for Time Not wo rked: Benefits under this category include: sick leave with pay, vacation pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time etc. Extra Pay for time Worked: This category covers the benefits such as: premiu m pay, incentive bonus, shift premiu m, old age insurance, profit sharing, unemp loyment co mpensation, Christmas bonus, Deewali or Poo ja bonus, food cost subsidy, housing subsidy, recreation. Organizations provide a variety of fringe benefits. The fringe benefits are classified under four heads as given here under: Employment Security: Benefits under this head include unemploy ment, insurance, technological adjustment pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays, cost of living bonus, call-back pay, layoff, retiring roo ms, jobs to the sons/daughters of the employees and the like. Health Protection: Benefits under this head include accident insurance, disability insurance, h ealth insurance, hospitalization, life insurance, med ical care, sick benefits, sick leave, etc. Old Age and Retirement: Benefits under this category include: deferred inco me plans, pension, gratuity, provident fund, old age assistance, old age counseling, and med ical benefits for retired emp loyees, traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the like. Personnel Identification, Participation and Stimulation: This category covers the following benefits: anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilit ies, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational programs, stress counseling, safety measures etc. Employee Security: Physical and job security to the employee should also be provided with a view to promot ing security to the emp loyee and his family members. The benefit of confirmation of the emp loyee on the job creates a sense of job security. Further a

minimu m and continuous wage or salary gives a sense of security to the life. Retrenchment Compensation: The Industrial Disputes Act, 1947 provides for the payment of co mpensation in case of lay -off and retrenchment. The nonseasonal industrial establishments employing 50 or mo re workers have to give one month ’s notice or one month’s wages to all the workers who are retrenched after one year’s continuous service. The co mpensation is paid at the rate of 15 days wage for every co mp leted year of service with a maximu m of 45 days wage in a year. Workers are eligib le fo r compensation as stated above even in case of closing down of undertakings. Lay-off Compensation: In case of lay-off, emp loyees are entitled to lay-off co mpensation at the rate to 50% of the total of the basic wage and dearness allowance for the period of their lay-off except for weekly holidays. Lay-o ff co mpensation can normally be paid up to 45 days in a year. Safety and Health: Emp loyee’s safety and health should be taken care of in order to protect the employee against accidents, unhealthy working conditions and to protect worker’s capacity. In India, the Factories Act, 1948, stipulated certain requirements regarding working conditions with a view to provide safe working en vironment. These provisions relate to cleanliness, disposal of waste and effluents, ventilation and temperature, dust and fume, art ificial hu midification, over crowding, lighting, drinking water, latrine u rinals, and spittoons. Provisions relating to safet y measures include fencing of mach inery, work on or near mach inery in motion, emp loyment of young persons on dangerous machines, striking gear and devices for cutting off power, self-acting machines, easing of new mach inery, probation of emp loyment of wo men and children near cotton openers, hoists and lifts, lift ing machines, chains ropes and lift ing tackles, revolving mach inery, pressure plant, floors, excessive weights, protection of eyes, precautions against dangerous fumes, explosive or inflammable dust, gas etc. Precautions in case of fire, power to require specifications of defective parts of test of stability, safety of buildings and machinery etc. Objectives of Fringe Benefits: The view point of employers is that fringe benefits form an important part of employee incentives to obtain their loyalty and retaining them. The important objectives of fringe benefits are: To create and improve sound industrial relations To boost up employee morale. To motivate the emp loyees by identifying and satisfyin g their unsatisfied needs. To provide qualitative work environ ment and work life. To provide security to the employees against social risks like old age benefits and maternity benefits. To protect the health of the employees and to provide safety to the employees against accidents. To promote emp loyee’s welfare by providing welfare measures like recreat ion facilities. To create a sense of belongingness among employees and to retain them. Hence, fringe benefits are called golden hand-cuffs. To meet requirements of various legislations relating to fringe benefits. Need for Extending Benefits to Employees: Rising prices and cost of living has brought about incessant demand for prov ision of extra benefit to the emp loyees. Emp loyers too have found that fringe benefits present attractive areas of negotiation when large wage and salary

increases are not feasible. As organizations have developed ore elaborate fringe benefits programs for their employees, greater pressure has been placed upon competing organizat ions to match these benefits in order to attract and keep emp loyees. Recognition that fringe benefits are non-taxable rewards has been major stimu lus to their expansion. Rapid industrializat ion, increasingly heavy urbanizat ion and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the adverse impact of these developments. Since it was workers who are responsible for production, it was held that emp loyers should accept responsibility for meeting some of the needs of their employees. As a result, some benefits -and-services programs were adopted by emp loyers The growing volu me of labor legislat ion, particularly social security leg islation, made it imperative for emp loyers to share equally with their employees the cost of old age, survivor and disability benefits. The growth and strength of trade unions has substantially influenced the growth of company benefits and services. Labor scarcity and co mpetition for qualified personnel has led to the initiation, evolut ion and implementation of a number of compensation plans. The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting fro m increasing industrialization should go, at least partly, to the emp loyees who are responsible for it, so that they may be protected against the insecurity arising fro m unemploy ment, sickness, injury and old age. Co mpany benefits -and-services programs are among some of the mechanisms wh ich managers use to supply this security.

Flexible Benefits:
What are Flexible Benefits? Flexib le benefits allows allow employees to pick benefits that most their needs. The idea is to allow each emp loyee to choose a benefit package that is individually tailo red to his or her own needs and situation. It replaces the traditional “one-benefit-plan-fits-all” programs that dominated organizat ions for more than 50 years. The average organization provides fringe benefits worth approximately 40% of an emp loyee’s salary. Traditional benefit programs were designed for the typical emp loyees of the 1950s —- a male with wife and two children at ho me. Less than 10% of emp loyees now fit this stereotype. While 25% of today ’s emp loyees are single, a third are part of t woincome families with no children. As such these traditional programs don ’t tend to meet the needs of today’s more diverse workforce. Flexible benefits, however, do meet these diverse needs. They can be uniquely tailored to reflect differences in emp loyee needs based on age, marital status, spouses ’ benefit status, number and age of dependents, and the like. The three most popular type of benefit plans are modular p lans, core-plus options, and flexib le spending accounts. Modular plans are pre-designed packages of benefits, with each module put together to meet the needs of a specific group of employees. So a module designed for single emp loyees with no dependents might include only essential benefits. Another, designed for single parents, might have additional life insurance, disability insurance, and expanded health coverage. Core-p lus plans consist of a core of essential benefits and a menu-like selection of other benefits options from which

emp loyees can select and add to the core. Typically, each employee is given “benefit credits,” which allow the “purchase” of additional benefits that uniquely meet h is or her needs. Flexib le spending plans allow emp loyees to set aside up to the dollar amount offered in the plan to pay for particular services. It’s a convenient way, for examp le, for emp loyees to pay for health-care and dental premiu ms. Flexib le spending accounts can increase employee take -ho me pay because emp loyees don’t have to pay taxes on the dollars they spend out of these accounts. Linking Flexible Benefits and Expectancy Theory: Giv ing all emp loyees the same benefits assumed that all employees have the same needs. Of course we know that assumption is false. Thus, flexible benefits turn the benefit expenditure into a motivator. Consistent with expectancy theory’s thesis that organizational rewards should be linked to each individual emp loyees goals, flexib le benefits indiv idualized rewards by allowing each emp loy to choose the compensation package that best satisfies his or her current needs. Flexible Benefits in Practice: Today almost all major Corporat ions in the United States offer Flexib le benefits. And they are becoming a norm in other countries too. For instances a recent survey of 136 Canadian Organizations found that 93% have adopted flexib le benefits or will in the near term. And a similar survey of 307 firms in the Un ited Kingdom found that while only 16% have flexible benefits programs in place, another 60% are either in the process of imp lementing them or are seriously considering them. In India and most countries of Asia with the exception of Japan Flexible benefits are not offered by employers for various reasons which may create personnel and trade union problems.. In India some flexible benefits are offered in a limited way to the top management personnel like Executive Directors, President, Vice President, General Manager etc., It may take a few mo re years to offer flexib le benefits to employees in India and other Asian counties by the managements.

401k Compensation system:
There are two main types of employer-sponsored retirement plans: defined benefit and defined contribution. A defined benefit plan, such as a traditional pension plan, sets the amount that the employer will pay to workers upon their retirement. In defined contribution plans, the plan sets the amount of the contributions that an employer makes, not the benefit it will pay at ret irement. In 1978, section 401(k)of the Internal Revenue Code authorized a new kind of defined contribution plan that allows the emp loyee to make pre -tax contributions to the plan. In a 401(k) plan, the emp loyer sets up a special savings and investment account with an investment company, a bank trust dept, or an insurance company. The emp loyee agrees to put part of his or her salary into the plan through automatic deductions each pay period. This money is deducted before the employee’s paycheck is taxed, so that it remains untaxed until it is taken out of the plan, often years or even decades later. Emp loyers frequently match employee contributions up to a certain level, somet imes by as much as 100 percent, but are not required to do so. The money in the plan is invested into one or more fun ds provided in the plan according to choices made by the employee. The p lans usually are intended to earn money over a very long period of t ime, wh ich is much less risky than short-term investing. Emp loyees like 401(k) plans for several reasons. The tax deferral an obvious plus. Others popular features include the

increased portability of this plan fro m one employer to another, the matching contributions, and the sense of control due to the ability to choose one’s own investments.

Objectives of Compensation Management:
The basic objective of compensation management can be briefly termed as meet ing the needs of both employees and the organization. Since both these needs emerge fro m different sources, often, there is a conflict between the two. This conflict can be understood by agency theory which exp lains relationship between employees and emp loyers. The theory suggests that employers and employees are two main stakeholders in a business unit, the former assuming the role of principals and the latter assuming the ro le of agents. The compensation paid to employees is agency consideration. Each party to agency tries to fix this consideration in its own favor. The emp loyers want to pay as little as possible to keep their costs low. Employees want to get as high as possible. The co mpensation management tries to strike a balance between these two with fo llo wing specific objectives: Attracting and Retaining Personnel: Fro m organizat ion’s point of view, the compensation management aims at attracting and retaining right personnel in the organization. In the Indian corporate scene, there is no dirth of personnel at operative levels but the problems come at the managerial and technical levels particularly for growing co mpanies. Not only they require persons who are well qualified but they are also retained in the organization. In the present day context, managerial turnover is a b ig problem particularly in high knowledge based organizations. Motivating Personnel: Co mpensation management aims at motivating personnel for higher productivity. Monetary compensation has its own limitat ions in mot ivating people for superior performance. Alfie Kohn has gone to the extent of arguing that corporate incentive plans not only fail to work as intended but also undermine t he objectives they intend to achieve. He argues that this is due to inadequate psychological assumptions on which reward systems are based. His conclusions are as follows: Rewards punish people-their use confirms that someone else is in control of the emp loyee. Rewards rupture relationships -they create competition where teamwork and collaboration are desired. Rewards ignore reasons-they relieve managers fro m the urgent need to exp lore why an employee is effective or ineffective. Rewards discourage risk taking-employees tend to do exactly what is required to earn the reward, and not any more. Rewards undermine interest-they distract both manager and the employee fro m consideration of intrinsic motivation. Notwithstanding these arguments, compensation management can be designed to motivate people through monetary compensation to some extent. Optimizing Cost of Compensation: Co mpensation management aims at optimizing cost of compensation by establishing some kind of lin kage with performance and compensation. It is not necessary that higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries. Co mpensation management tries to attempt at this. Consistency in Compensation:

Co mpensation management tries to achieve consistency-both internal and external-in co mpensating emp loyees. Internal consistency involves payment on the basis of criticality of jobs and employees' performance on jobs. Thus, higher compensation is attached to higher-level jobs. Similarly, h igher co mpensation is attached to higher performers in the same job. Level o f jobs within an organization is determined by job evaluation which will be d iscussed little later in this chapter. External consistency involves similar co mpensation for a job in all organizat ions. Though there are many factors involved in the determination of wage and salary structure for a job in an organization wh ich may result into some kind of disparity in the co mpensation of a particular job as compared to other organizations, compensation management tries to reduce this disparity.

Compensation Management Process:
In order to achieve the objectives of compensation management, it should pro ceed as a process. This process has various sequential steps as shown: Organization’s strategy Co mpensation policy Job analysis and evaluation Analysis of contingent factors Design and implementation of co mpensation plan Evaluation and rev iew Organization’s Strategy: Organization’s overall strategy though not a step of compensation management is the starting point in the total human resource management process including compensation management. Co mpanies operating in different types of market/product having varying level of maturity, adopt different strategies and matching co mpensation strategy and blend of different co mpensation methods. Thus, it can be seen that organizations follow different strategies in different market situations and align their co mpensation strategy and contents with these strategies. In a growing market, an organization can expand its business through internal expansion or takeover and merger of other organizations in the same line of business or a combination of both. In such a growing market, the inputs, particularly hu man resources, do not grow in the same proportion as the business expands. Therefore, in order to make the growth strategy successful, the organization has to pay high cash to attract talents. For examp le, informat ion technology is a fast growing business presently and we find maximu m merger and higher managerial co mpensation in this industry. In mature market, the organization does not grow through additional investment but stabilizes and the growth comes through making the present investment more effect ive, known as learning curve growth. In such a situation, average cash and moderate incentives may work. The benefits which have been standardized have to be maintained. In the dec lin ing market, the organization has to harvest profit through cash generation and cost cutting and if this cannot be sustained over the long run, the possible retrenchment of business to invest somewhere else. In such a case, compensation strategy involves cost control with belo w average cash and incentive payments. Cascio has observed that in viewing the co mpensation fro m strategic point of view, the co mpanies do the following:

They recognize remunerat ion as a pivotal control and incentive mechanism that can be used flexibly by the management to attain business objectives. They make the pay system an integral part of strategy formulation. They integrate pay considerations into strategic decision-making processes, such as those that involve planning and control. They view the co mpany's performance as the ultimate criterion of the success of the strategic pay decisions and operational remuneration programmes. Compensation Policy: Co mpensation policy is derived fro m organizational strategy and its policy on overall hu man resource management. In order to make co mpensation management to work effectively, the organization should clearly specify its compensation policy, which must include the basis for determining base compensation, incentives and benefits and various types of perquisites to various levels of employees. The policy should be linked with the organizational philosophy on human resources and strategy. Besides, many external factors which imp inge on the policy must also be taken care of Job Analysis and Evaluation. Job analysis provides basis for defin ing job description and job specification with the former dealing with various characteristics and responsibilities involved in a job and the latter dealing with qualit ies and skills required in job performer. Job analysis also provides base for job evaluation which determines the relative worth of various jobs in the organization. The relative worth of various jobs determines the compensation package attached with each job. Analysis of Contingent Factors: Co mpensation plan is always formu lated in the light of various factors, both external and internal, wh ich affect the operation of human resource management system. Various external factors are conditions of human resource market, cost of living, level of economic develop ment, social factors, pressure of trade unions and various labor laws dealing with compensation management. Various internal factors are organization ’s ability to pay and emp loyees' related factors such as work performance, seniority, skills, etc. These factors may be analy zed through wage/salary survey. The impact of these factors will be d iscussed later. Design and Implementation of Compensation Plan: After going through the above steps, the organization may be able to design its compensation plan incorporating base compensation with provision of wage/salary increase over the period of t ime, various incentive plans, benefits and perquisites. Sometimes, these are determined by external party, for example, pay commissions for Govern ment emp loyees as well as for public sector enterprises. After designing the compensation plan, it is imp lemented. Implementation of co mpensation plan requires its commun ication to employees and putting this into practice. Evaluation and Review: A compensation plan is not a rigid and fixed one but is dynamic since it is affected by a variety of factors which are dynamic. Therefore, co mpensation management should have a provision for evaluating and reviewing the compensation plan. After imp lementation of the plan, it will generate results either in terms of intervening variab les like employee satisfaction and morale or in terms of end-result variable like increase of productivity. However, this latter variable is

more impo rtant. The evaluation of co mpensation plan must be done in this light. If it does not work as intended, there should be review o f the plan necessitating a fresh look.

Designing and Developing the Compensation Plan:
Develop a program outline: Set an objective for the program. Establish target dates for imp lementation and comp letion. Determine a budget. Designate an individual to oversee designing the compensation program: Determine whether this position will be permanent or temporary. Determine who will oversee the program once it is established. Determine the cost of going outside versus looking inside. Determine the cost of a consultant's review. Develop a compensation philosophy: Form a co mpensation committee (presumab ly consisting of officers or at least includin g one officer of the company). Decide what, if any, d ifferences should exist in pay structures for executives, professional emp loyees, sales emp loyees, and so on (e.g., hourly versus salaried rates, incentive-based versus non-contingent pay). Determine whether the co mpany should set salaries at, above, or below market. Decide the extent to which emp loyee benefits should replace or supplement cash compensation. Conduct a job analysis of all positions: Conduct a general task analysis by major departments. What tasks must be accomplished by whom? Get input fro m senior vice presidents of market ing, finance, sales, administration, production, and other appropriate departments to determine the organizational structure and primary functions of each. Interview depart ment managers and key employees, as necessary, to determine their specific job functions. Decide which job classificat ions should be exempt and which should be nonexempt. Develop model job descriptions for exempt and nonexempt positions an d distribute the models to incu mbents for review and comment; adjust job descriptions if necessary. Develop a final draft of job descriptions. Meet with depart ment managers, as necessary, to review job descriptions. Finalize and document all job descriptions. Evaluate jobs: Rank the jobs within each senior vice p resident's and manager's department, and then rank jobs between and among departments. Verify ranking by comparing it to industry market data concerning the ranking, and adjust if necessary. Prepare a matrix organizational review. On the basis of required tasks and forecasted business plans, develop a matrix of jobs crossing lines and departments. Co mpare the matrix with data fro m both the company structure and the industry wide market. Prepare flo w charts of all ranks for each depart ment for ease of interpretation and assessment. Present data and charts to the compensation committee for review and adjustment. Determine grades: Establish the number of levels - senior, junior, intermed iate, and beginner - for each job family and assign a grade to each level.

Determine the number o f pay grades, or monetary range of a position at a particular level, within each department. Establish grade pricing and salary range: Establish benchmark (key) jobs. Review the market price of benchmark jobs within the industry. Establish a trend line in accordance with co mpany philosophy (i.e., where the company wants to be in relation to salary ranges in the industry). Determine an appropriate salary structure: Determine the difference between each salary step. Determine a minimu m and a maximu m percent spread. Slot the remaining jobs. Revie w job descriptions. Verify the purpose, necessity, or other reasons for maintaining a position. Meet with the compensation committee for review, ad justments, and approval. Develop a salary administration policy: Develop and document the general company policy. Develop and document specific policies for selected groups. Develop and document a strategy for merit raises and other pay increases, such as cost -of-living adjustments, bonuses, annual reviews, and promot ions. Develop and document procedures to justify the policy (e.g., performance appraisal fo rms, a merit raise schedule). Meet with the compensation committee for review, ad justments, and approval. Obtain top executives' approval of the basic salary program: Develop and present cost impact studies that project the expense of bringing the present staff up to the proposed levels. Present data to the compensation committee for review, ad justment, and approval. Present data to the executive operating co mmittee (senior managers and officers) for review and approval. Communicate the final program to employees and managers: Present the plan to the compensation committee fo r feedback, adjustments, review, and approval. Make a presentation to executive staff managers for approval or change, and incorporate necessary changes. Develop a plan for co mmunicat ing the new program to employees, using slide shows or movies, literature, handouts, etc. Make presentations to managers and employees. Implement the program. Design and develop detailed systems, procedures, and forms. Work with HR info rmation systems staff to establish effective imp lementation procedures, to develop appropriate data input forms, and to create effect ive monitoring reports for senior managers. Have the necessary forms printed. Develop and determine format specificat ions for all reports. Execute test runs on the human resources informat ion system. Execute the program. Monitor the program: Monitor feedback fro m managers. Make changes where necessary.

Find flaws or problems in the program and adjust or modify where necessary.