Compensation Management 1


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  • Compensation Management 1

    2. 2. AGENDA <ul><li>Define Compensation . </li></ul><ul><li>Elements of Compensation System. </li></ul><ul><li>CONCEPTS OF WAGE AND DIFFERENT KINDS OF WAGES. </li></ul><ul><li>Objectives of Compensation System. </li></ul><ul><li>How Compensation System is used ? </li></ul><ul><li>METHOD OF CALCULATING BASIC PAY AND ITS USE IN DESIGNING SALARY STRUCTURE. </li></ul><ul><li>What are the components of Compensation System? </li></ul><ul><li>Different types of Compensation System. </li></ul><ul><li>Compensation Plans. </li></ul><ul><li>Financial and Non Financial Incentive Schemes </li></ul>
    4. 4. <ul><li> A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. </li></ul>JOB DESCRIPTION
    5. 5. <ul><li>The process of analysing jobs from which job descriptions are developed. </li></ul><ul><li>Job analysis techniques include the use of interviews, questionnaires, and observation. </li></ul>JOB ANALYSIS
    6. 6. <ul><li>A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. </li></ul><ul><li>There are four main techniques: </li></ul><ul><li>Ranking </li></ul><ul><li>Classification </li></ul><ul><li>Factor Comparison </li></ul><ul><li>Point Method </li></ul>JOB EVALUATION
    7. 7. JOB EVALUATION METHODS Comparison Method Analysis Method Entire Job Job Factors Job Against Scale Job Against Job Classification Point Method Ranking Factor Comparison
    8. 8. DEFINITION <ul><li>A set of compensable factors are identified as determining the worth of jobs. Typically the compensable factors include the major categories of </li></ul><ul><li>Skill </li></ul><ul><li>Responsibilities </li></ul><ul><li>Effort </li></ul><ul><li>Working Conditions </li></ul>
    9. 9. FACTORE CAN BE FURTHER DEFINED <ul><ul><li>SKILLL </li></ul></ul><ul><ul><li>Experience </li></ul></ul><ul><ul><li>Education </li></ul></ul><ul><ul><li>Ability </li></ul></ul><ul><ul><li>RESPONSIBILITIES </li></ul></ul><ul><ul><li>Fiscal </li></ul></ul><ul><ul><li>Supervisory </li></ul></ul>
    10. 10. CONT. <ul><li>EFFORT </li></ul><ul><ul><li>Mental </li></ul></ul><ul><ul><li>Physical </li></ul></ul><ul><li>WORKING CONDITION </li></ul><ul><ul><li>Location </li></ul></ul><ul><ul><li>Hazards </li></ul></ul><ul><ul><li>Extremes in Environment </li></ul></ul>
    11. 11. POINT METHOD <ul><li>Advantages </li></ul><ul><li>Highly stable over time </li></ul><ul><li>Perceived as valid by users and employees </li></ul><ul><li>Likely to be reliable among committee that assesses the jobs </li></ul><ul><li>Provides good data to prepare a response to an appeal </li></ul><ul><li>Disadvantages </li></ul><ul><li>Time, money, and effort required to set up </li></ul><ul><li>Relies heavily on key (benchmark) jobs, so if key jobs and correct pay rates don’t exist, the point method may not be valid </li></ul>
    13. 13. WHAT IS A DEGREE LEVEL? <ul><li>It is a scale that reflects differing quantity or quality of the factor </li></ul><ul><li>It is used to differentiate jobs on the factor </li></ul><ul><li>It is a definition that is clear and unambiguous </li></ul><ul><li>It contains explicit language that spells out the behaviors, skills, or performance expectations for that factor at different levels of the factor </li></ul>
    14. 14. HOW DO YOU ASSIGN POINT VALUES TO THE ENTIRE SYSTEM? <ul><li>The maximum number of points assigned is a fairly arbitrary judgment (500-3000 is common) </li></ul><ul><li>The number must be large enough to allow sufficient differentiation among the jobs to be evaluated.  </li></ul><ul><li>If there is a very wide spread between the current wages of the highest paid job and the lowest paid job, the maximum number of points will need to be higher </li></ul><ul><li>If you choose more than one pay system, the number of points or the actual factors themselves do not have to be the same in each one. </li></ul><ul><li>SUGGESTION FOR YOUR PROJECT: Have no fewer than 1000 points and no more than 2000. </li></ul>
    15. 15. POINT VALUES TO FACTORS ALONG A SCALE <ul><li>Point values for Degrees Total </li></ul><ul><li>Factor 1 2 3 4 </li></ul><ul><li>Skill 45 90 135 180 450 </li></ul><ul><li>Physical effort 25 50 75 100 250 </li></ul><ul><li>Mental effort 35 70 105 150 360 </li></ul><ul><li>Responsibility 25 50 75 100 250 </li></ul><ul><li>Working conditions 20 40 60 80 200 </li></ul><ul><li>Maximum total points of all factors depending on their importance to job=1510 </li></ul>
    16. 16. RESPONSIBILITY <ul><li>Each employee is responsible for conserving the company’s equipment and material. </li></ul><ul><li>Level-1 </li></ul><ul><li>Employee reports malfunctioning of equipment or defective materials to the immediate superior. </li></ul><ul><li>Level-2 </li></ul><ul><li>Employee maintain the appearance of equipment or order of material and has responsibility for the security of such equipment or material </li></ul><ul><li>Level-3 </li></ul><ul><li>Employee perform preventive maintenance and minor repairs on equipment or corrects minor defects in material </li></ul><ul><li>Level-4 </li></ul><ul><li>Employee perform major maintenance or overhauls of equipment or responsible for deciding type, quality and quantity of material to be used. </li></ul>
    17. 17. Job Evaluation - Concept This potential to blend internal forces and external market forces is both a strength and a opportunity to job evaluation system.
    18. 18. Job Evaluation - Objectives <ul><li>Job evaluation is used to determine the relative value of each job in relation to all jobs within the organization. </li></ul><ul><li>Immediate objective: to obtain internal and external consistency in wages and salaries. </li></ul><ul><li>Ultimate objective: employee and employer satisfaction with wages and salaries paid. </li></ul>
    19. 19. <ul><li>HISTORY:- </li></ul><ul><li>1865 - Karl Marx wrote in Das Kapital that the value of goods and services is based on the amount of labor that goes into them </li></ul><ul><li>1885 - Frederick Winslow Taylor stated that the content of labor in labor determines the price of labor </li></ul><ul><li>1935 - Edward Hay developed the Hay point factor system </li></ul><ul><li>1963 - The Equal Pay Act prohibited discrimination on the basis of sex…for equal work on jobs, the performance of which requires equal skill, effort, and responsibility and which are performed under similar working conditions. The EPA formalized non-market based pay plans </li></ul>
    20. 20. 1 <ul><li>Thus, Ranking each job relative to all other jobs, usually based on some overall factor. </li></ul><ul><li>Steps in job ranking: </li></ul><ul><ul><li>Obtain job information. </li></ul></ul><ul><ul><li>Select and group jobs. </li></ul></ul><ul><ul><li>Select compensable factors. </li></ul></ul><ul><ul><li>Rank jobs. </li></ul></ul><ul><ul><li>Combine ratings . </li></ul></ul>Common Methods of Job Evaluations <ul><ul><ul><li>Ranking method: the grade consists of all jobs that fall within two or three ranks . </li></ul></ul></ul>
    21. 21. Importance of job evolution 1 > To involve the people occupying the positions under evaluation. This is especially so if you think your organizations job descriptions are poorly written or out of date. The people in positions and their immediate supervisors have the best idea of what the job is really about. 2 >Job evaluation is most effective as a participative exercise and this in itself can improve employment relations. It is therefore recommended that job evaluation is introduced or revised jointly by allowing management and employee representatives to discuss relevant issues initially in a non-negotiating forum 3>T o ensure integration of internal fairness and external competitiveness .
    22. 22. Up to date, accurate job descriptions are absolutely essential and should be reviewed for accuracy with the current incumbent before evaluation. More complex job evaluation techniques require more information and often the primary source of this is job descriptions, so the more complex the job evaluation scheme, the more detailed the job description needs to be. . Keep accurate records of decisions taken, to ensure openness, and transparency. Build confidence in the process and outcomes by briefing people Many organizations choose to engage consultants to manage parts or the entire process. These consultants often have access to the expensive but comprehensive data bases containing detailed information about remuneration levels in different sectors. job evaluation methods are not to be confused with performance management or appraisal, where the primary concern is with how well a job is performed . Aspects of job evolution
    23. 23. <ul><li>The 4 major factors on which this method are measured/ based are: </li></ul><ul><li>Company size </li></ul><ul><li>Strategic level </li></ul><ul><li>Impact </li></ul><ul><li>Complexity and Problem Solving </li></ul>
    24. 24. Managerial Jobs: Characteristics <ul><li>Communication </li></ul><ul><li>Teamwork/motivation </li></ul><ul><li>Liaison/networking </li></ul><ul><li>Service delivery </li></ul><ul><li>Decision making </li></ul><ul><li>Planning & organising </li></ul><ul><li>Initiative & problem solving </li></ul><ul><li>Analytical & research skills </li></ul><ul><li>Sensory & physical demands </li></ul><ul><li>Work environment </li></ul><ul><li>Pastoral care </li></ul><ul><li>Team development </li></ul><ul><li>Teaching & learning </li></ul><ul><li>Knowledge & experience </li></ul>
    25. 25. Job evaluation process The major objectivity of job evaluation process is to establish satisfactory wage and salary differentials, so job analysis should precede the actual programme of evaluation. Objective of job evaluation Job description Job analysis Job evaluation Job specification Wage survey Employee classification
    26. 26. Job Evaluation Methods <ul><li>Job Ranking Method </li></ul><ul><ul><li>Examines job description and arrange jobs according to value to company e.g. highest to lowest. </li></ul></ul><ul><li>Job Classification Method </li></ul><ul><ul><li>Classes or grades are defined to describe a group of jobs e.g. government organisations. </li></ul></ul><ul><li>Point Method </li></ul><ul><ul><li>Breaking down jobs on identifiable criteria and the degree to which these criteria exist on the job. </li></ul></ul>
    27. 27. Job Evaluation Methods 1/5/2008 Advantage Disadvantage Ranking Fast, simple, easy to explain. Cumbersome as number of jobs increases. Basis for comparisons is not always acceptable. Classification Can group a wide range of work together in one system. Descriptions may leave too much room for manipulation. Point Compensable factors call out basis for comparisons. Compensable factors communicate what is valued. Can become bureaucratic and rule-bound.
    28. 28. Manager: Key Evaluation Factors <ul><li>Decision making and problem solving </li></ul><ul><li>Responsibility </li></ul><ul><li>Accountability </li></ul><ul><li>Skills </li></ul>
    29. 29. Hay’s Method – 3 Factors Jobs exist to achieve an end result Accountability Accountability Therefore, the job holder requires a level of knowledge and experience commensurate with the scale and complexity of the result Problem Solving To achieve this end result, job holders must address problems, create, analyse and apply judgement 1 3 2 Accountability Problem Solving Know-How
    30. 30. Hay’s Method - Process Depth & Range of Know-How Planning & Organising Communicating & Influencing Freedom to Act Nature of Impact Area of Impact (Magnitude) Thinking Environment Thinking Challenge KNOW- HOW PROBLEM SOLVING ACCOUNTABILITY + + = Job Size
    31. 31. Compensation Plan of Executives <ul><li>Broad banding – paying executives at preset levels based on their level of competency. </li></ul><ul><li>Golden parachute – a financial protection plan for top executives in case they are severed from the organisation. </li></ul>
    32. 32. Implications <ul><li>Purpose of evaluation should be clearly defined </li></ul><ul><li>Adoption of appropriate technique </li></ul><ul><li>Allocation of sufficient resources </li></ul>
    33. 33. Criticism <ul><li>Systematic rather than scientific </li></ul><ul><li>Reliable but validity is determined by ascertaining the impact upon employee satisfaction. </li></ul><ul><li>Conflict on value of the job. </li></ul>
    34. 34. <ul><li>Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. </li></ul><ul><li>Pay for each job is pre-determined through collective bargaining. </li></ul>PAY STRUCTURE
    35. 35. Contd… <ul><li>Sources of Compensation. </li></ul><ul><li>Compensation Methods. </li></ul><ul><li>Compensation Structure. </li></ul><ul><li>Administration Of compensation </li></ul><ul><li>Financial and Non Financial Incentives </li></ul><ul><li>Wages Act </li></ul><ul><li>N.H.P.C. </li></ul><ul><li>Conclusion </li></ul><ul><li>References </li></ul>
    36. 36. What is Compensation System? <ul><li>Compensation is a systematic approach. </li></ul><ul><li>Compensation is a tool. </li></ul><ul><li>Compensation System is flexible. </li></ul>
    38. 38. Objectives of compensation system <ul><li>Acquire qualified personnel </li></ul><ul><li>Retain present employees </li></ul><ul><li>Ensure equity </li></ul><ul><li>Reward desired behavior </li></ul><ul><li>Control costs </li></ul><ul><li>Comply with legal regulations </li></ul><ul><li>Facilitate understanding </li></ul><ul><li>Further administration efficiency </li></ul>
    39. 39. How Compensation System is used <ul><li>Compensation is used to: </li></ul><ul><li>Recruit and retain qualified employees. </li></ul><ul><li>Increase or maintain morale/satisfaction. </li></ul><ul><li>Reward and encourage peak performance. </li></ul><ul><li>Achieve internal and external equity. </li></ul><ul><li>Reduce turnover and encourage company loyalty. </li></ul><ul><li>Modify (through negotiations) practices of unions. </li></ul>
    40. 40. Components of compensation system <ul><li>Job Descriptions :- define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs </li></ul><ul><li>1. Job Analysis :- The process of analyzing jobs from which job descriptions are developed. </li></ul><ul><li>2. Job evaluation :- for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements </li></ul>
    41. 41. Continue… <ul><li>Pay Structures :- based on several grades pay structure is determined through collective bargaining (unions) </li></ul><ul><li>Salary Surveys :- May include average salaries, inflation indicators, cost of living indicators, salary budget averages. </li></ul>
    42. 42. Different types of compensation system <ul><li>Base Pay </li></ul><ul><li>Commissions </li></ul><ul><li>Overtime Pay </li></ul><ul><li>Bonuses, Profit Sharing, Merit Pay </li></ul><ul><li>Stock Options </li></ul><ul><li>Travel/Meal/Housing Allowance </li></ul><ul><li>Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes... </li></ul>
    43. 43. Compensation Plans <ul><li>Develop a program outline. </li></ul><ul><li>Designate an individual to oversee designing the compensation program. </li></ul><ul><li>Develop a compensation philosophy. </li></ul><ul><li>Conduct a job analysis of all positions. </li></ul><ul><li>Evaluate jobs. </li></ul><ul><li>Determine grades. </li></ul><ul><li>Establish grade pricing and salary range. </li></ul>
    44. 44. Continue………. <ul><li>Determine an appropriate salary structure. </li></ul><ul><li>Develop a salary administration policy. </li></ul><ul><li>Obtain top executives' approval of the basic salary program. </li></ul><ul><li>Communicate the final program to employees and managers. </li></ul><ul><li>Monitor the program. </li></ul>
    45. 45. Sources of Compensation Data <ul><li>Labour </li></ul><ul><li>Employer Information </li></ul><ul><li>Employer Association </li></ul><ul><li>Professional Association </li></ul>
    46. 46. Compensation Methods <ul><li>There are basically two compensation system viz. Basis Time Rate and Piece Rate. </li></ul><ul><li>Its is meant for making payment, which should adequate compensate the worker for his efforts. </li></ul>
    47. 47. Compensation System
    48. 48. Time Rate System
    49. 49. Piece Rate System
    50. 50. Compensation Structure <ul><li>Compensation System Consists of the following: </li></ul><ul><li>Salary, Basic Salary or Consolidated Salary: </li></ul><ul><li>Grade wise flat Allowance: </li></ul><ul><li>Reimbursements of expenses: </li></ul><ul><li>Annual payments: </li></ul><ul><li>Benefits: </li></ul><ul><li>Employee stock option schemes : </li></ul><ul><li>“ Total cost to the Company” concept : </li></ul><ul><li>Retiral benefits: </li></ul><ul><li>Performance Bonus : </li></ul>
    51. 51. Compensation Administration <ul><li>The major functions of an administration consist of the following: </li></ul><ul><li>Approval and /or recommendation of management on job evaluation methods and findings. </li></ul><ul><li>Review and recommendation of basic wage and salary structure. </li></ul><ul><li>Co-ordination and review of relative departmental rates to ensure conformity. </li></ul><ul><li>Review of budget estimates for wage and salary adjustments and increases. </li></ul>
    52. 52. Principles of Administration of Compensation <ul><li>There should be a definite plan to ensure that differences in pay for jobs are based upon variations in job requirements. </li></ul><ul><li>Prompt and correct payments of the dues of the employees. </li></ul><ul><li>The plan should carefully distinguish between jobs and employees. </li></ul><ul><li>Equal pay for equal work. </li></ul>
    53. 53. Continue… <ul><li>The wage and salary structure should be flexible. </li></ul><ul><li>The employees and the trade union, if there is one, should be informed about the procedures used to establish wage rates. </li></ul><ul><li>The wage should be sufficient to ensure for the worker and his family reasonable standard of living. </li></ul>
    54. 54. Financial and Non Financial Incentives <ul><li>An incentive scheme can offer employees extra pay according to individual or group performance targets. </li></ul><ul><li>Examples include: </li></ul><ul><ul><ul><li>profit-related and share option schemes </li></ul></ul></ul><ul><ul><ul><li>bonuses </li></ul></ul></ul><ul><ul><ul><li>commission </li></ul></ul></ul>
    55. 55. Continue….. <ul><li>Non-financial Example include: </li></ul><ul><ul><ul><ul><li>vouchers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>extra holidays </li></ul></ul></ul></ul><ul><ul><ul><ul><li>gifts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>company cars </li></ul></ul></ul></ul>
    56. 56. Advantages and Disadvantages Incentives Advantages Disadvantages Financial 1.Focus on hitting target 2.Achievement a given value 1.Rewards are sometimes small 2.Can demoralize if not earned Non Financial 1.Can recognize employee priorities and lifestyle 2.Can encourage attachment to business 1.Can be taken for granted 2.May be inappropriate
    57. 57. Reasons For Introducing An Incentive Scheme <ul><li>1. Increase in earnings for employees? </li></ul><ul><li>2. Increase in output? </li></ul><ul><li>3. Improvement in quality? </li></ul><ul><li>4. Better mobility of labour? </li></ul><ul><li>5. More efficient methods of working? </li></ul><ul><li>6. Improvement in safety? </li></ul><ul><li>7. Higher housekeeping standards? </li></ul><ul><li>8. Reduction in absenteeism? </li></ul><ul><li>9. Reduction in labour turnover? </li></ul><ul><li>10.Reduction in overtime working? </li></ul>
    58. 58. What Type Of Work Needs An Incentive Scheme? <ul><li>Does the work necessitate skilled, semi-skilled or unskilled labour? </li></ul><ul><li>Can individual skill be fully applied when manipulating machines etc. or is the employee’s quantity and quality of output regulated to a large extent by factors outside his/her control? </li></ul><ul><li>Does the level of output remain steady throughout the year or is it subject to seasonal variations? </li></ul>
    59. 59. Continue…. <ul><li>Is production organized on a process, flow line, batch or jobbing basis? </li></ul><ul><li>Have your current production methods been recently reviewed for maximum efficiency? </li></ul><ul><li>Is any new machinery or plant, to be introduced in the near future, likely to upset the standard upon which an incentive scheme might be based? </li></ul>
    60. 60. ACT’S GOVERNING WAGE ADMINISTRATION IN INDIA <ul><li>The Wages Act determines the legal regulation of the remuneration of persons who work under an employment contract, the grant of guarantees and payment of compensation relating to remuneration. </li></ul>
    61. 61. PAYMENT OF WAGES ACT(1936) <ul><li>The Payment of Wages Act, 1936 is a central legislation which applies to the persons employed in the factories and to persons employed in industrial or other establishments specified in sub-clauses (a) to (g) of clause ) of section 2 of this Act </li></ul><ul><li>This Act does not apply on workers whose wages payable in respect of a wage period average Rs. 1600/- a month or more. </li></ul>
    62. 62. SALIENT FEATURES:- <ul><li>This Act has been enacted with the intention of ensuring timely payment of wages to the workers and for payment of wages without unauthorized deductions </li></ul><ul><li>The salary in factories/establishments employing less than 1000 workers is required to be paid by 7th of every month and in other cases by 10th day of every month. </li></ul>
    63. 63. Continue…. <ul><li>A worker, who either has not been paid wages in time or an unauthorized deductions have been made from his/her wages, can file a Claim either directly or through a Trade Union or through an Inspector under this Act, before with the Authority appointed under the Payment of Wages Act </li></ul>
    64. 64. MINIMUM WAGES ACT(1948) <ul><li>This act provides for fixing minimum rates of wages in certain employment. </li></ul><ul><li>The inspectorate staff of the Labour Department takes action on complaints received from workmen/Unions, Suo moto action can also be taken. </li></ul>
    65. 65. Continue…. <ul><li>Apart from the action by the Inspectorate in the Department, if a worker gets less payment, he can also file a claim before the Competent Authority appointed under the Act, which are Deputy Labour Commissioners for the respective districts. The authority can impose penalty up to 10 times the difference in minimum wages that was due and paid. </li></ul>
    66. 66. Payment of Gratuity Act, 1972 <ul><li>Gratuity is a lump sum payment made by the employer as a mark of recognition of the service rendered by the employee when he retires or leaves service. </li></ul><ul><li>The Act is applicable to every factory, shop or an establishment, in which ten or more persons are employed, or were employed on any day of the proceeding twelve months. </li></ul><ul><li>An employee is eligible for receiving gratuity payment only after he has completed five years of continuous service. </li></ul>
    67. 67. N.H.P.C. – National Hydroelectric Power Corporation <ul><li>N.H.P.C. was incorporated under the Company's Act 1956 in November 1975. </li></ul><ul><li>A Central Government Enterprise with the initial authorised share capital of Rs. 2000 million for hydro power development in Central Sector. </li></ul>
    68. 68. Compensation structure <ul><li>Basic salary : </li></ul><ul><li>Savings :- CPF, LIC, PPF, NSC, MIS </li></ul><ul><li>Bonus </li></ul><ul><li>Arrears </li></ul><ul><li>Medical allowance </li></ul><ul><li>Education allowance </li></ul><ul><li>Price </li></ul><ul><li>Stocks </li></ul><ul><li>Salary of an employee </li></ul>
    69. 69. Methods of compensation system <ul><li>Time rate System </li></ul><ul><ul><li>Ordinary level </li></ul></ul><ul><ul><li>High wage level </li></ul></ul><ul><ul><li>Graduated time rate </li></ul></ul><ul><li>Contracts </li></ul><ul><ul><li>Yearly </li></ul></ul><ul><ul><li>Monthly </li></ul></ul><ul><ul><li>Quarterly </li></ul></ul>
    70. 70. Administration of compensation <ul><li>Entrusted to job executives </li></ul><ul><li>Supported by the advice of technical staff </li></ul><ul><li>Final approval by top executives </li></ul><ul><li>Performance appraisal by various managers </li></ul><ul><li>Final decision by Chairman. </li></ul>
    71. 71. Executive plans for compensation <ul><li>Level of individual performance. </li></ul><ul><li>Level of company performance. </li></ul><ul><li>Performance effectiveness. </li></ul><ul><li>Complete information on the relationship between bonus and performance. </li></ul><ul><li>Satisfaction and motivational effect. </li></ul>
    72. 72. DIFFERENT TYPES OF COMPENSATION PLANS <ul><li>Base Pay </li></ul><ul><li>Commissions </li></ul><ul><li>Overtime Pay </li></ul><ul><li>Bonuses, Profit Sharing, Merit Pay </li></ul><ul><li>Stock Options </li></ul><ul><li>Travel/Meal/Housing Allowance </li></ul><ul><li>Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes... </li></ul>
    73. 73. PROCESS OF DESIGNING A COMPENSATION PLAN <ul><ul><li>Develop a program outline. </li></ul></ul><ul><ul><li>Designate an individual to oversee designing the compensation program. </li></ul></ul><ul><ul><li>Develop a compensation philosophy. </li></ul></ul><ul><ul><li>Conduct a job analysis of all positions. </li></ul></ul><ul><ul><li>Evaluate jobs. </li></ul></ul><ul><ul><li>Determine grades. </li></ul></ul><ul><ul><li>Establish grade pricing and salary range. </li></ul></ul><ul><ul><li>Determine an appropriate salary structure. </li></ul></ul><ul><ul><li>Develop a salary administration policy. </li></ul></ul><ul><ul><li>Obtain top executives' approval of the basic salary program. </li></ul></ul><ul><ul><li>Communicate the final program to employees and managers. </li></ul></ul><ul><ul><li>Monitor the program. </li></ul></ul>
    74. 74. CRITERIA OF DEVELOPING A COMPENSATION PLAN <ul><li>Internal Vs External Equity : Will the compensation plan be perceived as fair within the company or will it be perceived as fair relative to what other employers are paying for the same type of labor? </li></ul><ul><li>Fixed Vs Variable Pay: Will the compensation be made monthly on a fixed basis – through base salaries – or will it fluctuate depending on such pre-established criteria as performance and company profits? </li></ul>
    75. 75. Continued… <ul><li>Performance Vs Membership: Will the compensation emphasize performance and its pay to individual or group contributions, or will it emphasize membership in the organization – logging in a prescribed number of hours each week and progressing up the organizational ladder? </li></ul><ul><li>Job Vs Individual Pay: Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job? </li></ul>
    76. 76. Continued.. <ul><li>Monetary Vs Non-monetary Awards: Will the compensation plan emphasize motivating employee through monetary awards rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security? </li></ul><ul><li>Open Vs Secret Pay: Will employees have access to information about other workers compensation levels and how compensation decisions are made (open pay), or will this knowledge be withheld from employees(secret pay)? </li></ul><ul><li>Centralization Vs Decentralization Of Pay Decisions: Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s unit? </li></ul>
    77. 77. Continued… <ul><li>Egalitarianism Vs Elitism: Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism) ? </li></ul><ul><li>Below-Market Vs Above-Market Compensation: Will employees be compensated at below-market levels, at market levels, or at above-market levels? </li></ul>
    78. 78. DETERMINANTS OF COMPENSATION <ul><li>Category of Employees </li></ul><ul><li>Bargaining power of the employee and his trade union </li></ul><ul><li>Demand and supply manpower for the specific category of position or job </li></ul><ul><li>Good payment to the employees </li></ul><ul><li>Firm’s ability to pay economically viable and healthy corporate citizens </li></ul><ul><li>The salary of its people productivity, profitability and firm’s financial position </li></ul>
    79. 79. Continued… <ul><li>The Standard of Living </li></ul><ul><li>The Government Regulations </li></ul>
    80. 80. A Monetary Compensation plan must fulfill four conditions: <ul><li>Should attract and keep appropriate number of people in the organization; </li></ul><ul><li>Should motivate the people at work to contribute their best toward the company’s objective; </li></ul><ul><li>Should satisfy the needs of the company’s own people; </li></ul><ul><li>Should not attract frequent demand and struggle of people for wage enhancement affecting the cordial industrial relations. </li></ul>
    81. 81. ELEMENTS OF TOTAL COMPENSATION Total Compensation Base Compensation Incentive Compensation / Variable compensation Supplementary compensation paid to large group of employees
    82. 82. A. BASE COMPENSATION <ul><li>Basic pay fixed to various categories of jobs, post or positions –> Basic Pay/ Scale of Pay </li></ul><ul><li>Paid mostly in monetary terms -> Monetary Compensation </li></ul><ul><li>Factors considered in the process: </li></ul><ul><ul><li>Job Content – the job expected to be carried out by the employee and his worth to be on that particular job; </li></ul></ul><ul><ul><li>Bargaining Power of the trade union, or that of the employee, representing the trade or the job; </li></ul></ul>
    83. 83. Continued… <ul><ul><li>Demand-supply interplay or the specific category of jobs or positions; </li></ul></ul><ul><ul><li>Remuneration level in the industry, identical firms or the firms in the locality for the specific job; </li></ul></ul><ul><ul><li>Ability of the firm to pay; </li></ul></ul><ul><ul><li>Productivity, profitability and financial position of the firm; </li></ul></ul><ul><ul><li>Cost/Standard of living in the environment of the organization; </li></ul></ul><ul><ul><li>Government Regulations. </li></ul></ul>
    84. 84. B. INCENTIVE COMPENSATION <ul><li>A good incentive system motivates people to put in their best efforts to perform well. </li></ul><ul><li>Commonly used to motivate people at work. </li></ul><ul><li>Steps of the process: </li></ul><ul><ul><li>Fixation of Performance Standards </li></ul></ul><ul><ul><li>Fixation of specific Incentive Schemes </li></ul></ul><ul><ul><li>Linking of performance levels with organizational objective </li></ul></ul><ul><ul><li>Classification of performance standards </li></ul></ul>
    85. 85. Continued… <ul><ul><li>Periodical feedback </li></ul></ul><ul><ul><li>Conspicuous Incentive </li></ul></ul><ul><ul><li>Constitution of a committee for the administration of incentive schemes </li></ul></ul><ul><ul><li>Linking of HRD programs with incentive schemes </li></ul></ul><ul><ul><li>Publication of names of recipients </li></ul></ul><ul><ul><li>Awards and Promotions </li></ul></ul><ul><ul><li>Honor of Incentive-takers </li></ul></ul><ul><ul><li>Incentive scheme and Corporate Policy </li></ul></ul>
    86. 86. Continued… <ul><ul><li>Active involvement of top management </li></ul></ul><ul><ul><li>Clubbings of incentives with lease compensation </li></ul></ul><ul><ul><li>Adequate financial allocation </li></ul></ul><ul><ul><li>Adjustment of performance standard and incentive </li></ul></ul><ul><ul><li>Acceptance of suggestions from the employees </li></ul></ul>
    87. 87. EXAMPLES: <ul><li>FINANCIAL </li></ul><ul><ul><ul><li>Profit-related and share option schemes </li></ul></ul></ul><ul><ul><ul><li>Bonuses </li></ul></ul></ul><ul><li>Commission </li></ul><ul><li>NON-FINANCIAL </li></ul><ul><li>Vouchers </li></ul><ul><li>Extra holidays </li></ul><ul><li>Gifts </li></ul><ul><li>Company Cars </li></ul>
    88. 88. C. SUPPLEMENTARY COMPENSATION <ul><li>It includes additional annual wage, employee profit sharing (present day bonus), production sharing plans, employee’s equity participation as an additional bonus </li></ul>
    90. 90. <ul><li>Salary and Wage level may be higher than or equal to what is prevailing in the surroundings or in the industry; </li></ul><ul><li>Monetary remuneration should be adequate to meet the needs; </li></ul><ul><li>Monetary remuneration system should not be exorbitantly higher or lower; compared with existing standards; </li></ul><ul><li>It is better to pay the salary a few days in advance before it fails due; </li></ul>
    91. 91. <ul><li>A sound merit-rating and systematic job evaluation may be used as the basis for pay fixation; </li></ul><ul><li>There should be some scope for pay hikes to offset the inflationary tendencies; </li></ul><ul><li>Monthly salary may be supported by financial incentive schemes so that there would be scope for every executive to increase his income by increasing his performance. </li></ul>
    92. 92. METHODS OF REMUNARATION <ul><li>Time-Work/Day-Work System </li></ul><ul><li>Straight Piece-Work System </li></ul><ul><li>Differential Piece Rate System </li></ul><ul><li>Group Bonus System </li></ul><ul><li>Priestman’s Production Bonus </li></ul><ul><li>Cost-Efficiency Bonus Plan </li></ul><ul><li>Emerson Efficiency Bonus </li></ul><ul><li>Halsey Premium Plan </li></ul><ul><li>Rowan Bonus Plan </li></ul>
    93. 93. FACTORS DETERMINING THE LEVEL OF REMUNERATION <ul><ul><li>Production and the nature of work </li></ul></ul><ul><ul><li>Use of machines </li></ul></ul><ul><ul><li>Use of labor </li></ul></ul><ul><ul><li>Labor supply </li></ul></ul><ul><ul><li>Wage policy </li></ul></ul>
    94. 94. KINDS OF WAGES <ul><li>MINIMUM WAGE: that wage which is sufficient to cover the bare physical needs of a worker and his family </li></ul><ul><li>FAIR WAGE: something more than the minimum wage providing mere necessities </li></ul><ul><li>LIVING WAGE: the normal needs of the average employee, regarded as human beings in a civilized community </li></ul><ul><li>NEED BASED MINIMUM WAGE: should be ‘need based’; should ensure the satisfaction of the minimum needs of the industrial worker. </li></ul>
    95. 95. Time-Work/Day-Work System <ul><li>Employees are remunerated at pre -determined hourly/daily rates for hours/days they are actually employed in the factory </li></ul>
    96. 96. <ul><li>Advantages: </li></ul><ul><ul><ul><li>Simple </li></ul></ul></ul><ul><ul><ul><li>Quality Control and Steady Income </li></ul></ul></ul><ul><li>Disadvantages: </li></ul><ul><ul><ul><li>No distinction </li></ul></ul></ul><ul><ul><ul><li>Go Slow Habits </li></ul></ul></ul><ul><ul><ul><li>Constant Supervision </li></ul></ul></ul>
    97. 97. Straight Piece-Work System <ul><li>A rate of payment is fixed for each piece of completed production. </li></ul><ul><li>The wage payment is calculated by multiplying the number of pieces completed by each employee by the piecework rate. </li></ul>
    98. 98. <ul><li>Advantages: </li></ul><ul><ul><ul><li>Simple </li></ul></ul></ul><ul><ul><ul><li>Facility of Incentive </li></ul></ul></ul><ul><ul><ul><li>Advance fixation of labor cost per unit </li></ul></ul></ul><ul><ul><ul><li>Less Supervision </li></ul></ul></ul><ul><li>Disadvantages: </li></ul><ul><ul><ul><li>Quality not maintained </li></ul></ul></ul><ul><ul><ul><li>Wastage and absenteeism </li></ul></ul></ul>
    99. 99. Differential Piece Rate System <ul><li>Production at different levels of efficiency are paid at different rates so that at higher levels of production, the worker earns a comparatively higher rate per unit. </li></ul><ul><li>Suitable where the work is of repetitive nature, the methods of equipment are standardized. </li></ul>
    100. 100. Continued… <ul><li>Principle systems that use the principle of differential piece rates: </li></ul><ul><ul><li>Taylor differential piece rate system </li></ul></ul><ul><ul><li>Merrick differential piece rate system </li></ul></ul><ul><ul><li>Gantt task bonus plan </li></ul></ul>
    101. 101. Taylor’s Differential Piece Rate System <ul><li>Introduced by Dr E.W. Taylor as an attempt to increase output of workers whom he considered were working far below their capacity. </li></ul><ul><li>It provides 2 piece rates, a low piece rate for output below standard and a high piece rate for output above standard </li></ul><ul><li>Suitable for large-scale industries. </li></ul>
    102. 102. Continued… <ul><li>Advantages: </li></ul><ul><ul><ul><li>Simple </li></ul></ul></ul><ul><ul><ul><li>Attraction to efficient workers </li></ul></ul></ul><ul><ul><ul><li>Strong Incentive </li></ul></ul></ul><ul><li>Disadvantages: </li></ul><ul><ul><ul><li>Unprofitable for beginners </li></ul></ul></ul><ul><ul><ul><li>Unsuitable </li></ul></ul></ul>
    103. 103. Merrick Differential piece-rate system Output Payment <ul><li>Up to 83% </li></ul>Normal Rate <ul><li>83-100% </li></ul>10% above the normal rate <ul><li>Over 100% </li></ul>30% above the normal rate
    104. 104. Gantt task bonus plan Output Payment <ul><li>Output below standard (high task) </li></ul>Time-Rate (guaranteed) <ul><li>Output at standard </li></ul>Bonus of 20% above the time-rate <ul><li>Output above standard </li></ul>High piece rate
    105. 105. Profit –Sharing <ul><li>American Council of Industries: </li></ul><ul><li>“ Profit-Sharing is a system where an employer gives to all the workers besides the regular appropriate wages, special current or postponed amount which is not based human groundwork but is based on the prosperity of the whole business.” </li></ul>
    106. 106. Profit Sharing Vs Co-partnership Basis Profit Sharing Co-Partnership Scope Allow labor only a share in the profit Has a wider scope and it includes profit sharing plus in the management also Features Brings about no handicap. No risk. No share in losses. Worker as a shareholder is tied down to the company. Reduces mobility. Cash Bonus We usually have cash bonus Indicates that a worker as a shareholder has a right to share in the profit as well as a voice in the bonus. Gets wage + dividend. Usually in kind. Promotion of Industrial Democracy One step short of co-partnership Gives wider diffusion of ownership Application of Scheme Applicable to any type of business Only to company enterprises Interest of worker Workers have no stake, hence no personal extent to that extent Labor enjoys a sense of ownership in the joint enterprise. Workers are personally interested in the success of the company.
    107. 107. Profit Sharing Vs Bonus Basis Profit Sharing Bonus Meaning Employer gives to the workers a portion of surplus profit of the business in addition to wages. A bonus to workman beyond their wages. Basis Profit showing is usually based on definite agreement between the employer and the worker. Payment of bonus depends on the sweet will of the employer or is provided of law. Legal provision No Act has been passed concerning profit sharing. Bonus Act has been passed in the year 1965. Statutory Obligation A voluntary payment although depends on agreement. Was originally , a voluntary payment has become a statutory obligation under the Payment of Bonus Act 1965.
    108. 108. 06/02/09
    109. 109. <ul><li>Acquire qualified personnel </li></ul><ul><li>Retain present employees </li></ul><ul><li>Ensure equity </li></ul><ul><li>Reward desired behavior </li></ul><ul><li>Control costs </li></ul><ul><li>Comply with legal regulations </li></ul><ul><li>Facilitate understanding </li></ul><ul><li>Future administration efficiency </li></ul>06/02/09
    110. 110. <ul><li>Recruit and retain qualified employees. </li></ul><ul><li>Increase or maintain morale/satisfaction. </li></ul><ul><li>Reward and encourage peak performance. </li></ul><ul><li>Reduce turnover and encourage company loyalty. </li></ul>06/02/09
    111. 111. <ul><li>Job Descriptions </li></ul><ul><li>Job Analysis </li></ul><ul><li>Job Evaluation </li></ul><ul><li>Pay Structures </li></ul><ul><li>Salary Surveys </li></ul><ul><li>Policy and Regulations </li></ul>06/02/09
    112. 112. <ul><li>Monetary </li></ul><ul><ul><li>Basic Salary </li></ul></ul><ul><ul><li>House Rent Allowance </li></ul></ul><ul><ul><li>Conveyance </li></ul></ul><ul><ul><li>Leave Travel Allowance </li></ul></ul><ul><ul><li>Medical Reimbursement </li></ul></ul><ul><ul><li>Special Allowance </li></ul></ul><ul><ul><li>Bonus </li></ul></ul><ul><ul><li>PF/Gratuity </li></ul></ul><ul><ul><li>ESOP’s </li></ul></ul><ul><ul><li>Overtime Policy </li></ul></ul><ul><li>Non Monetary </li></ul><ul><ul><li>Leave Policy </li></ul></ul><ul><ul><li>Car policy </li></ul></ul><ul><ul><li>Hospitalization </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Leave travel Assistance Limits </li></ul></ul><ul><ul><li>Retirement Benefits </li></ul></ul><ul><ul><li>Holiday Homes </li></ul></ul>06/02/09
    113. 113. <ul><li>Hay MSL method </li></ul><ul><li>*Knowhow </li></ul><ul><li>*Problem solving </li></ul><ul><li>*Accountability </li></ul>06/02/09
    114. 114. <ul><li>Salary. </li></ul><ul><li>Grade wise flat Allowance. </li></ul><ul><li>Reimbursements of expenses. </li></ul><ul><li>Annual payments. </li></ul><ul><li>Benefits. </li></ul><ul><li>Employee stock option schemes. </li></ul><ul><li>Retirement benefits. </li></ul><ul><li>Performance Bonus. </li></ul>06/02/09
    115. 115. <ul><li>Approval and Recommendation of management on job evaluation methods and findings. </li></ul><ul><li>Review and recommendation of basic salary structure. </li></ul><ul><li>Co-ordination and review of relative departmental rates to ensure conformity. </li></ul><ul><li>Review of budget estimates for salary adjustments and increases. </li></ul>06/02/09
    116. 116. <ul><li>There should be a definite plan to ensure that differences in pay for jobs are based upon variations in job requirements. </li></ul><ul><li>Prompt and correct payments of the dues of the employees. </li></ul><ul><li>The plan should carefully distinguish between jobs and employees. </li></ul><ul><li>Equal pay for equal work. </li></ul>06/02/09
    117. 117. <ul><li>Financial incentives: </li></ul><ul><ul><ul><li>Profit-related and share option schemes </li></ul></ul></ul><ul><ul><ul><li>Bonus </li></ul></ul></ul><ul><ul><ul><li>Commission </li></ul></ul></ul><ul><ul><ul><li>Non Financial incentives: </li></ul></ul></ul><ul><ul><ul><li>Extra holidays </li></ul></ul></ul><ul><ul><ul><li>Gifts </li></ul></ul></ul><ul><ul><ul><li>Company cars </li></ul></ul></ul><ul><ul><ul><li>Vouchers </li></ul></ul></ul>06/02/09
    118. 118. 06/02/09
    119. 120. Concept: <ul><li>The payment of dearness allowance facilitates employees and workers to face the price increase or inflation of  prices of goods and services consumed by him. The onslaught of price increase has a major bearing on the living conditions of the labour. </li></ul>
    120. 121. Definition <ul><li>“ Dearness Allowance is a kind of Allowance given to worker to bear the cost of living due to inflation, so that he she can at least live his life in &quot;some comfort” </li></ul><ul><li>“ The amount which is given to increase in the cost of living is called as DA.” </li></ul>
    121. 122. History: <ul><li>Originated in India after First World War </li></ul><ul><li>“ Dear Food Allowance” </li></ul><ul><li>Increase in Cost of Living Index in 1933-34 </li></ul><ul><li>Increase in DA at rate of 1.75 pies per day (1939) </li></ul><ul><li>Origin of RMMS in 1946 </li></ul><ul><li>“ Old Textile Allowance” (1947) </li></ul><ul><li>“ Revised Textile allowance”(1953) </li></ul>
    122. 123. METHODS OF DA CALCULATION <ul><li>In India, Dearness allowance (D.A.) is part of a person's salary. D.A. is calculated as a percent of the basic salary. This amount is then added to the basic salary along with house rent allowance to get the total salary. </li></ul><ul><li>1. Flat Rate </li></ul><ul><li>2. Graduated Scale </li></ul><ul><li>3. Cost of Living and Consumer Price Index No. </li></ul>
    123. 124. Contd…
    124. 125. Contd…. <ul><li>Cost of Living and Consumer Price Index Number: </li></ul><ul><li>a. Price Index Number is system of linking DA with </li></ul><ul><li>the Cost of Living Index </li></ul><ul><li>b. DA is calculated on the no. of points by </li></ul><ul><li>which the consumer price index has risen </li></ul><ul><li>above the base index. </li></ul><ul><li>Advantage: “Low-paid category of workers securing a much larger quantum of relief than High-paid workers.” </li></ul>
    125. 126. Importance: <ul><li>Protecting the value of Basic Salary Structure </li></ul><ul><li>Increase in cost of living </li></ul>