compensation structure

1. STRUCTURE OF COMPENSATION

2.  Compensation: Total rewards provided to
employees in return for services
 Direct financial compensation (core): Wages,
salaries, bonuses, and commissions
 Indirect financial compensation (employee
benefits): All other financial rewards
 Nonfinancial compensation: Satisfaction from job
itself or from psychological and/or physical
environment in which employee works
Compensation: An Overview
9-2

3. Total Compensation Components

4. Compensation
• The literal meaning of compensation 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 providing
services to his employer.
• Money and benefits received may be in different
forms - base compensation in money form and various
benefits, which may be associated with employee's
service to the employer like provident fund, gratuity,
insurance scheme and any other payment which the
employee receives or benefits he enjoys in lieu of such
payment.

5. • 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”

6. Components of Compensation
• Generally, compensation payable to an employee
includes the following three components:
Basic compensation for the job (wage/salary)
Incentive compensation for the employee on job
Supplementary compensation paid to employees
(fringe benefit and employee services)

7. Remuneration Packet of an employee
Wage/ Salary Fringe benefits Perquisites
Total
compensation
payable
Incentives
Non-monetary
benefits

8. Wages and salary
• Wages represent hourly rates of pay, and
salary refers to the monthly rate of pay,
irrespective of the number of hours put in
by the employee. Wages and salaries are
subject to the annual increments. They
differ from employee to employee, and
depend upon the nature of job, seniority,
and merit.

9. Incentives
• Incentives are paid in addition to wages and salaries
and are also called ‘payments by results’. Incentives
depend upon productivity, sales, profit, or cost
reduction efforts.
• There are:
• (a) Individual incentive schemes, and
• (b) Group incentive programmes.
Individual incentives are applicable to specific employee
performance. Where a given task demands group efforts
for completion, incentives are paid to the group as a
whole. The amount is later divided among group
members on an equitable basis.

10. Fringe benefits
• These are monetary benefits provided to
employees. They include the benefit of:
• (a) Provident fund,
• (b) Gratuity,
• (c) Medical care,
• (d) Hospitalization payment,
• (e) Accident relief,
• (f) Health and Group insurance,
• (g) Subsidized canteen facilities,
• (h) Recreational facilities, and
• (i) Provision of uniforms to employees.

11. Perquisites
• There are special benefits offered to
managers/executives. The purpose is to
retain competent executives. Perquisites
include the following:
(a) Company car for traveling,
(b) Club membership,
(c) Paid holidays,
(d) Furnished house or accommodation,
(e) Stock option schemes, etc.

12. Non-monetary benefits
• These benefits give psychological satisfaction
to employees even when financial benefit is
not available. Such benefits are:
• (a)Recognition of merit through certificate,
etc.
• (b)Offering challenging job responsibilities,
(c)Promoting growth prospects,
• (d)Comfortable working conditions,
• (e)Competent supervision, and
• (f) Job sharing and flexi-time

13. Non-financial compensation
• Non-financial compensation is different incentives given to
employees that are not in the form of direct pay.
• Alternative Work Schedules - there are many alternatives to
a traditional 5 day, 8-hour work schedule.
• On-the-Job Training- showing workers how to perform tasks
by observing others.
• Work/Life Balance - when an employer understands the
needs employees have to juggle in their lives.
• Developmental Opportunities - training and other
opportunities for employees to expand their knowledge
and improve their skills.
• Casual Dress - allowing employees to relax their dress code
at work.

14. Major Components of Compensation
1. Salary, Basic Salary or Consolidated Salary continues to remain as the
major component of compensation, though Salary Scales are often
discarded these days, or used only as guides. Individual Salary is generally
decided initially using the Scale, but thereafter performance, contribution
to targets or results generated determine the revisions periodically, which
may vary widely from individual to individual. ‘Salary broad banding is
therefore, getting recognition and acceptance.
2. Gradewise flat Allowance are being considered generally, except where
tax exemption benefits are still available, when they continue as separate
components. Allowances may be linked to the Salary as a percentage or
by slabs, but preference is for flat amounts, which do not increase
automatically, and therefore increase could be discretionary, and
therefore controllable.

15. 3. Reimbursements of expenses incurred on Company
work has become limited, and in line to conform to the
tax laws. Being actual in most cases, they are not
considered as apart of the compensation, unless it is
provided towards personal benefits.
4. Annual payments: Bonus or Commission, and Leave
travel are common features some tax relief’s apply for
the latter.

16. 5. Benefits generally comprise of mostly unfurnished
company owned or leased accommodation, use of
company or leased vehicles, medical coverage, retiral
benefits covering Provident Fund, Pension or
Superannuation and Gratuity, post-retiral medical
assistance, easy loan schemes at low or zero interest rates
for house building, cars or vehicles, furniture or utility
items etc. renting employees owned housing, club
entrance free reimbursement etc.
Minor benefits could be provision of security, driver or
gardening assistance, else of products or assets at a
concessional rate, relocation and transfer expenses
including admission etc. fees for children, credit card fees,
phones etc.

17. 6. Employee stock option schemes which has been
popular in IT industry-,is not extensively used yet,
not being tax advantageous to other industries, nor
seen as being very attractive with lesser growth
trends for their share values especially in the well-
established older companies.
7. Most companies, as against earlier visible costs,
use the “ Total cost to the Company” concept as
basis. Cost of the most benefits are averaged or
computed on actual basis, and within the system of
the overall cost, but with greater compliance to tax
laws, this basket concept is on the wane.

18. 8. Retiral benefits: Some in recognition of the
past contribution of pensioners, and to partly
offset the inflation post retirement practices
periodic improvement in pensions, or a
guaranteed grade minimum pension.
9.Performance Bonus that do not increase future
liability is being given more as a recognition of
results generated. It requires transparent,
balanced and fair systems and benchmarks, and
also agree targets by the managers in advance
during planning and review discussions.

19. 10. From the earlier grade oriented compensation system
within reasonable boundaries, compensation often has to be
somewhat tailor made for specialist or key contributors to
retain them in the very volatile job market.
11.Compensation review periods have become annual
generally and sometimes oftener, as compared to every three
to five years earlier, in the fast changing market situation.
12.Retention strategies employed are generally the attractive
interest free or at low rates for loans, on which market rate of
interest may apply on early exit, renting employee owned
property to set off repayment of loans, qualifying period s or
attractive service benefits added to the retrial benefits or post
retirement benefits etc.

20. DETERMINANTS OF THE WAGE
STRUCTURE
Economic Determinants
• Adam Smith explains occupational wage
differentials in terms of
• (1)hardship, (2) difficulty of learning the job, (3)
stability of employment, (4)responsibility of the
job, and (5) chance for success or failure in the
work.
• This is a theory of wage structure. But his
standards of worth are equally useful in
explaining the complexity of wage structure
decisions

21. Job worth
• These two concepts of worth and the concept of internal
labour markets combine to explain important differences
among employers in wage structure decisions.
• Organizations with relatively open internal labour markets
(organizations in which most jobs are filled from outside)
make much use of market value. They also make much use
of wage and salary surveys in wage structure decisions.
• Conversely, organizations with relatively closed internal
labour markets (most jobs are filled from inside) emphasize
use value. Their analysis of job worth relies more heavily on
perceptions of organization members of the relative value
of jobs.

22. Training
• Some other wage structure determinants derived
from economic analysis may be noted.
• Training requirements of jobs in terms of length,
difficulty, and whether the training is provided by
society, employers, or individuals constitute a
primary factor in human-capital analysis and thus
job worth.
• The interaction of ability requirements with
training requirements can yield different job
values depending on the scarcity of the ability
required and the number of people who try to
make it in the occupation and fail.

23. Employee tastes
• Employee tastes and preferences are another
economic factor. People differ in the occupations they
like and dislike. In like manner, occupations have non-
monetary advantages and disadvantages of many
kinds.
• Worker expectations of future earnings strongly
influence occupational choice and thus labour supplies.
Unfortunately, labour-market information is far from
perfect, and responses to labour-market shortages are
likely to be more prompt than responses to
oversupplies.

24. Unions
• Industrial as opposed to craft unionism has also
been shown by economic analysis to affect wage
structures. Industrial unions, with their heavy
proportions of semiskilled members, are more
likely to favor absolute increases.
• Although large organizations where employees
are represented by industrial unions may have a
highly differentiated wage structure, they pay less
attention to percentage differentials than they
would in the presence of craft unions

25. Discrimination
• Another economic determinant is
discrimination. Although wage differentials
based on sex or race are unlawful, they still
exist. The extent to which such differences are
based on productivity differences or represent
discrimination is very much a wage structure
issue.

26. Social Determinants
• The just-price theory advocated setting wages in accordance with
the pre-established status distribution: wages were to be
systematically regulated to keep each class in its customary place in
society.
• The theory emphasized equity, the tying of wages to status, and the
preservation of customary relationships. But whereas social forces
generally operate to maintain what is customary and accepted,
market forces have been operating to narrow differentials.
• Market forces usually operate through the shifting of labour
supplies. One reason that social forces seem to predominate is the
slow reaction of supply to price. Supply shortages are more
effective in raising pay than supply surpluses are in lowering

27. Organizational Determinants
• Organizations develop jobs to get their work done. Labour services
acquire specific economic meaning only in relation to the particular
jobs in which they are performed. In our economic system, the
organization typically designs jobs and selects employees to fill
them.
• The jobs the organization designs are the source of the
contributions provided by employees and a primary determinant of
their rewards. Through these jobs and pay decisions about them,
the organization is structuring the market for labour services.
• Other organizations differing in technology, management
competence, competitive economics, and collective bargaining are
also designing jobs. As a consequence, it is quite unlikely that the
jobs designed by one organization will be identical to those of other
organizations. Furthermore, the decisions that go into job design
are not made once and for all, but are subject to revision, as market
conditions, technology, and institutional influences change.

28. Employee Acceptance
• The employment exchange and of equity theory suggests
that a primary criterion of organization wage structures is
employee acceptance. Both the employment exchange and
equity theory strongly suggest that employees‘ decisions to
acquire and retain organization membership are based on
their perception of a favorable ratio of rewards to
contributions.
• The most visible employee contribution is the job to which
he or she is assigned. Most organizations base wage
structures primarily on the work content of jobs and the
value of that work to the organization.
• Work content is determined by job analysis. Relative value
of work is determined by job evaluation. Equity theory
postulates that employees must accept both processes as
fair if the system is to achieve its purpose.

29. OTHER INFLUENCES ON THE WAGE
STRUCTURE
• Society People and institutions both have a hand in designing jobs and
wage structures. Craft unions, for example, determine the kinds of work
their members do and expect employing organizations to adjust to these
decisions. Jobs for clerical workers are structured by the institutions that
train them, with the result that clerical jobs are often quite similar in
different organizations.
• Professional employees and managers insist on having a say in the design
of their jobs, and the result is influenced in part by the institutions that
train them. At the other extreme are semiskilled factory employees.
• Organizations employing these workers are subject to little influence on
job design by either employees or unions, except in job-redesign
decisions. Unions of semiskilled factory workers typically insist, however,
on participating in the latter decisions. This participation is guided by
customary relationships among and within employee groups. Custom also
operates in nonunion situations, causing resistance to change in job design

30. The Labour Market
• The labour market influences the wage and salary structure through the
supply of labour. But organizations differ greatly on how many of their jobs
are highly market-oriented, particularly in those organizations in which the
labour supply is mostly provided from within the organization.
• Most organizations replace the external labour market with an internal
labour market that makes decisions by administrative means rather than
according to supply and demand.
• These organizations have restricted ports of entry, which are highly
sensitive to the labour market but rely on the organization's internal
labour supply to fill most job openings. The exception occurs when there is
an internal and external shortage of people to fill vacancies for specific
skills. In fact, any job for which qualified people are in short supply
becomes a market-sensitive job.
• But given relatively adequate labour supplies, the labour market
determines wages only if the labour market: is structured by unions, is
otherwise well organized, or is designed to fill openings from outside the
organization.

31. Unions
• Unions affect wage structure, but the differential effects of
craft and industrial unionism and the type of bargaining
relationship are considerable.
• Craft unions tend to determine craft rates as well as the
design of craft jobs for all organizations employing
members of the craft. The limit of craft rates is the cost-
price resistance of employers.
• Industrial unions, on the other hand, are more concerned
than craft unions with employing organizations, but less
concerned with product markets because they often
bargain with organizations in many product markets.
• Thus, industrial unions may attempt to impose a common
wage structure on organizations, even if the wage structure
clashes with product market realities.

32. The Organization
• Organizations whose members come largely from a well-organized and
competitive labour market but are not unionized have what might be called
market-oriented wage structures. Organizations of this type have only limited
choices, because jobs are easily identified and are quite uniform throughout the
market. Banks, insurance companies, department stores, and restaurants are
organizations with primarily market-oriented wage structures. Professionals are
groups of employees whose jobs have been designed largely by the educational
process they have been through. This makes for a commonality between
organizations in the design of professional jobs.
• Organizations having many specialized jobs, dealing in labour markets too
disorganized to provide adequate grading and pricing, and lacking unionization
have primarily internally determined wage structures. Such wage structures may
be influenced by product markets, but only if labour cost is high relative to total
cost. Internally determined wage structures result from management decisions
and may range from highly rational structures flowing from job evaluation to a
system of personal rates. Organizations in small towns, isolated locations, or
nonunion communities provide examples, as do unique organizations in larger
communities, and government employment.