Compensation and performance management


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Compensation and performance management

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Compensation and performance management

  1. 1. Compensation and performance managementHRM strives to achieve organizational goals and the goals of employees througheffective personnel programs policies and procedures. Successful performances of thepersonnel function can greatly enhance the bottom line of any organization. Thepersonnel practitioners however are challenged more today than at any time in the historyby a changing and more demanding labor force that has high expectation about the workplace. At the same time, rapidly advancing technologies and outside influences arechanging the nature of our jobs. It is thus more critical and more difficult to maintain awork environment that motivates and satisfies Human Resources.Edward flippo states: "personnel management is the planning, organizing, directing andcontrolling of the procurement, development compensation, integration, maintenance andseparation of human resources to the end that individual, organizational and societalobjectives are accomplished."According to Wayne. F. Cascio "Compensation which includes direct cash payment,indirect payments in the form of employee benefits and incentives to motivate employeesto strive for higher levels of productivity is a critical component of the employmentrelationship. Compensation affected by forces as diverse as labor market factors.Collective bargaining, government legislation and top management philosophy regardingpay and benefits"Compensation may be defined as money received for the performance of work plus manykind of benefits and services that organizations provide their employee.Compensation is recompense, reward, wage or salary given by an organization to personsor a group of persons in return to a work done, services rendered, or a contribution madetowards the accomplishment of organizational goals. Wage, dearness allowance, bonusand other allowance are examples of monetary compensation, while goodaccommodation, children education, transport facilities, subsidized ration of essentialcommodities, etc. come under non-monetary compensation. In short, wage paid to collarworkers or salaries paid to white collar employee can be classified as compensation.A good compensation package is a good motivator. Hence, the primary responsibility ofthe HR manager is to ensure that the companys employees are well paid.OBJECTIVES OF COMPENSATION:To attract capable applicants. To retain current employee so that they dont quit. Theemployee is motivated for better performance. Reward desired behavior. To ensureequity. To control cost.Facilitate easy understanding by all i.e. employee operatingmanager and HR personnel
  2. 2. BASIC COMPENSATIONWAGE:The remuneration paid, for the service of labour in production, periodically to anemployee/worker. Wages means any economic compensation paid by the employer undersome contract to his workers for the services rendered by them. Usually refer to thehourly rate paid to such groups as production and maintenance employees wages includefamily allowance, relief, pay, financial support etc.SALARY:Salary is influenced by the size of a company by the specific industry, and in part by thecontribution of the incumbent to the process of decision-making. Salary refers to theweekly or monthly rates paid to clerical, administrative and professional employees.Salary is determined by mutual agreement between the individual and the employer.INCENTIVE:An incentive scheme is a plan or programs to motivate industries or group performance.An incentive program is most frequently built on monetary, but may also include avariety of non- monetary rewards or prizes.DETERMINATSThe effective use of incentives depends on three variables. They are:1. The individual.2. The work situation.3. The incentive plan.Factors influencing compensation:1. Organizations capacity to pay2. Prevailing pay and benefits in the industry:3. Compensation in the industry and availability of special competent personnel4. Flexibility, i.e. kind of competencies and abilities in managers:5. Performance/productivity/responsibilities of individual.6. Organization philosophy such as to be leader or pay prevailing rates.7. Qualifications and relevant experience.8. Stability of employment and advancement opportunities."Compensation literally means to counterbalance to offset, and to make up for. It impliesan exchange. Compensation translates into different meaning among countries and evenovertime".Society View:According to G.T Milkovich and bloom "perception of compensation differ withincountries as well. Some in society may see pay difference as a measure of justice.Stockholder View:To stockholder, executives pay is of special interest. In united state stock option are
  3. 3. commonly believed to tie pay of executives to the financing performance of the company.Employees:Employee may see compensation as an exchange of service rendered or as a reward for ajob well done. Compensation to some reflects the value for their personal skills andabilities, or the return for the education training they have acquired. The pay individualreceive for the work they perform is usually the major source of personal income andfinancial security and hence a vital determinants of an individual economic and socialwell being.Managers:Managers also have a stake in compensation: it directly influences their success in twoways. First it is a major expense competitive pressure both internationally anddomestically, forces managers to consider the affordability of their compensationdecisions. Studies show that many enterprises labor costs account for more than 50% oftotal costs. Among some industries, such as service or public employment, this figure iseven higher.In addition to treating pay as an expense, a manager also treats compensation as apossible influence on employee work attitude and behavior and their organizationperformance. The way the people are paid affects the quality of their work, their focus oncustomer needs, and their willingness to be flexible and learn new skills, to suggestinnovation and improvement, and even their interest in union or legal action against theiremployer.FORMS OF PAYTotal compensation includes pay received directly as cash (e.g., base wage, meritincreases, incentives, and cost of living adjustment) or indirectly through benefits andservices (e.g., pensions, health insurance, paid time off). Programs that distributecompensation to employees can be designed in an unlimited number of ways, and asingle employer typically uses more than one program. The major categories ofcompensation include base wage, merit pay, short and long term incentives, andemployee benefits and services.Base wageBase wage is the basic cash compensation that an employer pays for the work performed.Base wage tends to reflect the value of the work or skills and generally ignores differenceattributable to individual employees. Some pay systems set base wage as a function of theskill or education an employee possesses; this is common for engineers and scientists.Periodic adjustments to base wages may be made on the basis of change in the overallcost of living or inflation, changes in what other employers are paying for the same work,or changes in experience/ performance/ skills of employees.IncentivesIncentives also tie pay directly to performance. Sometimes referred to as variable
  4. 4. compensation, incentives may be long or short term, and can be tied to the performanceof an individual employee, a team of employees, combination of individuals, team ofemployees, a total business unit, or some combination of individuals, teamed unit.Performance objectives may be defined as cost savings, volume produced, qualitystandards met, revenues, return on investments or increased profits; the possibilities areendless.Long-term incentives are intended to focus employee efforts on multi year result. Topmanagers or professionals are often offered stock ownership or bonuses to focus on long-term organizational objectives such return on investments, market share, return on netassets and the like. Coca-Cola grants shares of stock to selected "key contributors" whomake outstanding contribution to the firms success. Microsoft, Pepsi, Wal Mart andProctor & Gamble offer stock options to all their employees. These companies believethat having a stake in the company supports a culture of ownership. Employees willbehave like owners.Incentives and merit pay differs. Although both may influence performance, incentivesdo so by offering pay to influence future behavior. Merit on the other hand, recognizesoutstanding past performance. The distinction is a matter of timing. Incentives systemsare offered prior to the actual performance; merit pay on the other hand, typically is notcommunicated beforehand.The national commission on labor makes the following recommendation with respect toincentives:(a) The application of incentives schemes has usually to be selected and restricted toindustries and occupations where it is possible to measure on an agreed basis, the outputof workers or a group of concerned workers and maintain a substantial amount of controlover its quality.(b) Incentive schemes have to embrace as many employees of an enterprise as possibleand need not be limited only to operative or direct workers.(c) A careful selection of occupations should be made for launching incentives schemewith the help of work-study teams commanding the confidence of both the employer andemployees. The incentive scheme is required to be simple so that the workers are able tounderstand its full implications. The employers need to ensure that external factors suchas non-availability of raw material and components, transport difficulties andaccumulation of stock do not exert an unfavorable impact on incentive schemes.(d) Production has to be organized in such a way, which does not provide incentivewage on one day, and unemployment on the other day- there should be a provision of thefullback wage as a safeguard against it.(e) According to Subramaniam, there are several prerequisites to the effectiveinstallation and operation of payment system:
  5. 5. a.) It should be developed and introduced with the involvement of the workers concernedin a harmonious climate of industrial relations.b) Work-study precedes the installation of incentive programs.c) The wage structure should be rationalized on the basis of job evaluation beforedevising an incentive plan.d) The objective to be accomplished through incentives should be defined andaccordingly, an attempt should be made to select a scheme, which is most suitable toaccomplish them.BENEFITS & SERVICESThe fringe benefit systems purported to develop a climate for healthy employer-employeerelationship, minimize excessive labor turnover costs and provide a feeling of individualsecurity against hazards and problems of life with a view to eventually enhancingemployee loyalty to the company and improving productivity.M.Chandra lucidly describes fringe benefits provided by the employers to theiremployees under the statutory provision or on a voluntary basis. The social servicesprovided under the factories Act, 1948, in the manufacturing industries include canteen,rest shelters, creche, storage or lockers, sitting arrangement, bathing and washingfacilities and appointment of welfare officers, etc. other benefits include festival, year-end profit sharing, attendance and production bonuses, protective equipments, freesupply of food items on concessional rates. Social security system provides benefits suchas provident fund, employees state insurance (ESI) scheme, retrenchment compensation,employment injury compensation, maternity benefits, gratuity, pension, dependentallowance and contribution toward pension and gratuity claims.In addition, other facilities enjoyed by the workers include medical and health care,restaurants, cooperative credit societies and consumer stores, company housing, houserent allowance. Recreational and cultural services, clubs, cash assistance. Someemployers also provide education, transport facilities and conveyance allowance.Laxmi Narain points that fringe benefits are an integral part of the reward system in thepublic sector undertaking and relate to management motivation similar to basiccompensation. : Over 200 ebooks, templates, forms forperformance appraisal.