compensation administation

1. UNIVERSITY SCHOOL OF MANAGEMENT
TOPIC : COMPENSATION ADMINISTATION
SUBMITTED TO SUBMITTED BY
MR MOHAMMAD QAIS VIDYASAGAR

2. ANNOTATED OUTLINE
16-2
INTRODUCTION
Compensation is what employees receive in exchange for their contribution
to the organization. Generally speaking, employees offer their services for
three types of rewards
 Base pay
 Variable pay
 Benefits
Compensation Administration
The most important objective of any pay system is fairness or equity, generally
expressed in three forms
 Internal equity: where more difficult jobs are paid more
 External equity: where jobs are fairly compensated in comparison to
similar jobs in labour market
Individual equity: where equal pay is ensured for equal work

3. 16-3
Objectives of compensation planning
 Attract talent
 Retain talent
 Ensure equity
 Reward appropriately(loyalty, commitment, experience, risk raking and other
desired behaviours)
 Control costs
 Comply with legal rules
 Ease of operation
Compensation Administration

4. 16-4
Equity And Pay Rates
Equity in pay rates could be achieved through five steps
Compensation Administration
Ensuring equity in pay rates
 Find the worth of each job through job evaluation
 Conduct a salary survey through the following methods
 Key job matching
 Key class matching
 Occupational method
 Job evaluation method
 Broad classification method
 Group similar jobs into pay grades(pay grades are groups of jobs within a
particular class that are paid the same rate
 Price each pay grade by using wage curve(curve in a scatter diagram
representing the relationship between relative worth of jobs and wage rates)
 Fix a pay rage for each grade (like pay for officer category I, II, III etc)

5. 16-5
Components of Pay Structure
The two essential components of pay structure are; basic wages and
dearness allowance .the basic wage rate is fixed taking the skill
needs of the job, experience needed, difficulty of work, training
required, responsibilities involved and the hazardous nature of the job.
Dearness allowance it paid to employees in order to compensate
them for the occasional or regular rise in the price of essential
commodities.
Compensation Administration
Components of pay structure in India
 Under the Workmen's Compensation Act
Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus
and good conduct bonus
 Under the Payment of Wages Act
Retrenchment compensation, payment in lieu of notice , gratuity payable on
discharge

6. 16-6
The following, however, do not come under the term wages
 Bonus
 Payments made under a profit sharing scheme
 Value of house accommodation
 Medical allowances
 Travelling allowances
 Any other sum paid to defray special expenses incurred by
the worker
 Contribution to pension, provident fund
 Any amenity or service excluded from the computation of
wages
Compensation Administration
Components of Pay Structure

7. 16-7
It is the process of managing a company’s compensation (base
compensation as well as supplementary) programme Base
compensation, here, refers to monetary payments to employees in
the form of wages and salaries. It is a fixed, non-incentive kind of
payment calculated on the basis of time spent by an employee on
the job. Supplementary compensation signifies incentive payments
based on the actual performance of an employee.
Compensation Administration
Wage And Salary Administration

8. 16-8
 Objectives
 To establish a fair and equitable remuneration
 To attract competent personnel
 To retain present employees
 To control labour cost
 To improve motivation and morale of employees
 To project a good image of the company
Compensation Administration
Wage And Salary Administration
 Principles
 Wage and salary plans be sufficiently flexible
 Job evaluation being done scientifically
 Wage and salary plans be always consistent with overall
plans
 Wage and salary plans being responsive to changing
conditions

9. Factors affecting compensation
levels
16-9
Compensation Administration
Factors influencing compensation levels
 Job needs
 Ability to pay
 Cost of living
 Prevailing wage rates
 Unions
 Productivity
 State regulation
 Demand and supply of labour

10. 16-10
Compensation Administration
Wage Policy In India
A wage policy offers certain guidelines for determining a wage
structure. The term wage structure refers to various pay scales
showing rages of pay within each grade. Three important elements of
wage policy in India need to be elaborated here
 Minimum wage: Wage sufficient to sustain and preserve the
efficiency of the worker and offer basic amenities of life
 Fair wage: It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as the
productivity of labour, prevailing wage rates, level of national
income and its distribution, the employer’s capacity to pay etc.
 Living wage: This is the highest amount of wages proposed by
the government, offering basic amenities of life and satisfying
the social needs of worker.

11. 16-11
Compensation Administration
State regulation of wages
Institutions involved in fixation of
wages
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Employer
Collective Bargaining
Legislation Minimum Wages Act
Wage Boards Payment of Wages Act
Pay Commissions Adjudication Machinery

12. 16-12
Compensation Administration
Wage differentials
Differences in wage rates are inevitable in any industry and the
reasons are fairly obvious
Reasons for wage differentials
Wage differentials Reasons
Interpersonal differentials Differentials in sex, skills, age, knowledge, experience
Inter-occupational differentials Varying requirements of skill, knowledge, demand-supply situation
Inter-area differentials Cost of living, ability of employers to pay, demand and supply situation, extent
of unionisation
Inter-firm differentials Ability of employer to pay, employees’ bargaining power, degree of
unionisation, skill needs, etc.

13. 16-13
Compensation Administration
Choices In Designing A
Compensation System
The compensation that is followed by a firm should be in tune with
its own unique character and culture and allow the firm to achieve
its strategic objectives. A variety of choices confront a firm here:
 Internal and external pay
 Fixed vs. variable pay
 Performance vs. membership

14. 16-14
Compensation Administration
Guidelines for effective performance
based pay stems
To be fair to employees, organisations should keep the following guidelines in mind
while instituting merit-pay systems
 Establish high standards of performance, so that only the truly outstanding
employees emerge as winners.
 Develop accurate performance appraisal systems. The focus must be on job-
specific, results-oriented criteria as well as employee behaviours.
 Train supervisions in the mechanics of carrying out appraisals and offering
feedback to employees in a proper way.
 Tie rewards closely to performance.
 Use a wide range of increases. Also, make pay increases meaningful.
Choices In Designing A
Compensation System

15. 16-15
Compensation Administration
Suitability of job based vs. knowledge
based pay systems
A job based-pay system is suitable
when:
 Jobs do not change often
 Technology is stable
 Lot of training is required to learn a
given job
 Turnover is relatively how
 Employees are expected to move
up through the ranks over time
 Jobs are fairly standardised within
the industry
Individual-based pay system is suitable
when:
 The firm has relatively educated
employees with both the ability and
willingness to learn different jobs
 The firm's technology, processes are
subject to frequent change
 Vertical growth opportunities are
limited
 Opportunities to learn new skills
exist
 Teamwork and employee
participation are encouraged
 Job vs. individual pay
Choices In Designing A
Compensation System

16. 16-16
Compensation Administration
Broad banding vs. Competency
based pay system
Organisations that follow a skill-based or Competency Based Pay System frequently
use broad banding to structure their compensation payments to employees. Broad
branding simply compresses many traditional salary grades (say 15 to 20 grades)
into a few wide salary bands (three or four grades). By having relatively few job
grades, this approach tries to play down the value of promotions. Depending on
changing market conditions and organisational needs, employees move from one
position to another without raising objectionable questions, (such as when the new
grade is available, what pay adjustments are made when duties change etc.) As a
result movement of employees between departments, divisions and locations
becomes smooth. Employees with greater flexibility and broader set of capabilities
can always go in search of jobs in other departments or locations that allow them to
use their potential fully. Broad banding, further, helps reduce the emphasis on
hierarchy and status. However, broad banding can be a little unsetting to a new
recruit when he is made to roll on various jobs. Most employees still believe that the
existence of many grades helps them grab promotional opportunities over a period of
time. Any organisation having fewer grades may be viewed negatively – as having
fewer upward promotion opportunities. Moreover, a number of individuals may not
want to move across the organisation into other areas.

17. 16-17
Compensation Administration
 Below market vs. above market compensation
 Open vs. secret pay
Choices In Designing A
Compensation System

18. Managerial Compensation In India
16-18
Compensation Administration
Executive compensation is built around three factors in India
 Job complexity
 Employers’ ability to pay
 Managerial productivity

19. 16-19
Compensation Administration
Executive compensation: Private
sector vs. Public sector
In a well publicised front page news sometime back The Economic Times mentioned
about the miserable salary levels of top executives in public sector units in India. For
example the State Bank of India chief is paid 10% of HDFC Bank Managing Director,
BHEL's chief getting about Rs.10 to 12 lakhs per year as against ABB's MD getting
nearly Rs.40 to 50 lakhs; Indian Oil Corporation's chief getting Rs.10 to 15 lakhs per
annum as against Reliance Industries' Ambanis getting a package of over Rs.10 crore
per annum. Salary levels in 'hot' private sector such as BPO, hospitality,
biotechnology 'Media', IT, Telecommunications, Oil, Automobiles and Insurance are
way above the packages offered to executives in public sector for various reasons
such as: overstaffing, inefficient processes, pressure on margins due to competition,
appointment of people without requisite skills at the top level, political interference
especially in pricing the products or services, legal constraints etc.

20. 16-20
Compensation Administration
How to retain talent?
 Improving communication
 Changing work rules
 Increasing pay and incentives
 Ego massaging services
 Non-poaching agreements
 Opportunities to upgrade skills and knowledge
 Offering jobs with stretch, pull and challenge