Human Resource is the most vital resource for any organization.
It is responsible for each and
every decision taken, each and every work done and each and every result. Employees should
be managed properly and motivated by providing best remuneration and compensation as per
the industry standards. The lucrative compensation will also serve the need for attracting and
retaining the best employees.
Compensation is the remuneration received by an employee in return for his/her contribution
to the organization. It is an organized practice that involves balancing the work-employee
relation by providing monetary and non-monetary benefits to employees.
Compensation is an integral part of human resource management which helps in motivating
the employees and improving organizational effectiveness.
Components of Compensation System
Compensation systems are designed keeping in minds the strategic goals and business
objectives. Compensation system is designed on the basis of certain factors after analyzing
the job work and responsibilities. Components of a compensation system are as follows:
Types of Compensation
Compensation provided to employees can direct in the form of monetary benefits and/or
indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation
does not include only salary but it is the sum total of all rewards and allowances provided to
the employees in return for their services. If the compensation offered is effectively managed,
it contributes to high organizational productivity.
Direct Compensation
Indirect Compensation
Need of Compensation Management
A good compensation package is important to motivate the employees to increase the
organizational productivity.
Unless compensation is provided no one will come and work for the organization.
Thus, compensation helps in running an organization effectively and accomplishing
its goals.
Salary is just a part of the compensation system, the employees have other
psychological and self-actualization needs to fulfill. Thus, compensation serves the
purpose.
The most competitive compensation will help the organization to attract and sustain
the best talent. The compensation package should be as per industry standards.
Strategic Compensation
Strategic compensation is determining and providing the compensation packages to the
employees that are aligned with the business goals and objectives. In today’s competitive
scenario organizations have to take special measures regarding compensation of the
employees so that the organizations retain the valuable employees. The compensation
systems have changed from traditional ones to strategic compensation systems.
Direct compensation refers to monetary benefits offered and provided to employees in
return of the services they provide to the organization. The monetary benefits include basic
salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements,
special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite
time.
Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her for a
certain period say a day, a week, a month, etc. It is the money an employee receives from
his/her employer by rendering his/her services.
House Rent Allowance
Organizations either provide accommodations to its employees who are from different state
or country or they provide house rent allowances to its employees. This is done to provide
them social security and motivate them to work.
Conveyance
Organizations provide for cab facilities to their employees. Few organizations also provide
vehicles and petrol allowances to their employees to motivate them.
Leave Travel Allowance
These allowances are provided to retain the best talent in the organization. The employees are
given allowances to visit any place they wish with their families. The allowances are scaled
as per the position of employee in the organization.
Medical Reimbursement
Organizations also look after the health conditions of their employees. The employees are
provided with medi-claims for them and their family members. These medi-claims include
health-insurances and treatment bills reimbursements.
Bonus
Bonus is paid to the employees during festive seasons to motivate them and provide them the
social security. The bonus amount usually amounts to one month’s salary of the employee.
Special Allowance
Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses,
reduced interest loans; insurance, club memberships, etc are provided to employees to provide
them social security and motivate them which improve the organizational productivity.
Indirect compensation refers to non-monetary benefits offered and provided to
employees in lieu of the services provided by them to the organization. They include
Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel
Assistance Limits, Retirement Benefits, Holiday Homes.
Leave Policy
It is the right of employee to get adequate number of leave while working with the
organization. The organizations provide for paid leaves such as, casual leaves, medical leaves
(sick leave), and maternity leaves, statutory pay, etc.
Overtime Policy
Employees should be provided with the adequate allowances and facilities during their
overtime, if they happened to do so, such as transport facilities, overtime pay, etc.
Hospitalization
The employees should be provided allowances to get their regular check-ups, say at an
interval of one year. Even their dependents should be eligible for the medi-claims that
provide them emotional and social security.
Insurance
Organizations also provide for accidental insurance and life insurance for employees.
This gives them the emotional security and they feel themselves valued in the
organization.
Leave Travel
The employees are provided with leaves and travel allowances to go for holiday with
their families. Some organizations arrange for a tour for the employees of the
organization. This is usually done to make the employees stress free.
Retirement Benefits
Organizations provide for pension plans and other benefits for their employees which
benefits them after they retire from the organization at the prescribed age.
Holiday Homes
Organizations provide for holiday homes and guest house for their employees at
different locations. These holiday homes are usually located in hill station and other
most wanted holiday spots. The organizations make sure that the employees do not
face any kind of difficulties during their stay in the guest house.
Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to work
during normal shifts due to their personal problems and valid reasons.
Evolution Of Compensation
Today’s compensation systems have come
from a long way. With the changing
organizational structures workers’ need and
compensation systems have also been
changing. From the bureaucratic
organizations to the participative
organizations, employees have started asking
for their rights and appropriate
compensations. The higher education
standards and higher skills required for the
jobs have made the organizations provide
competitive compensations to their
employees.
Compensation strategy is derived from the
business strategy. The business goals and
objectives are aligned with the HR strategies.
Then the compensation committee or the
concerned authority formulates the
compensation strategy. It depends on both internal and external factors as well as the
life cycle of an organization.
Evolution of Strategic Compensation
Traditional Compensation Systems
In the traditional organizational structures, employees were expected to work hard and
obey the bosses’ orders. In return they were provided with job security, salary
increments and promotions annually. The salary was determined on the basis of the
job work and the years of experience the employee is holding. Some of the
organizations provided for retirement benefits such as, pension plans, for the
employees. It was assumed that humans work for money, there was no space for other
psychological and social needs of workers.
Change in Compensation Systems
With the behavioral science theories and evolution of labour and trade unions,
employees started asking for their rights. Maslow brought in the need hierarchy for the
rights of the employees. He stated that employees do not work only for money but
there are other needs too which they want to satisfy from there job, i.e. social needs,
psychological needs, safety needs, self-actualization, etc. Now the employees were
being treated as human resource.
Their performance was being measured and appraised based on the organizational and
individual performance. Competition among employees existed. Employees were
expected to work hard to have the job security. The compensation system was
designed on the basis of job work and related proficiency of the employee.
Maslow’s Need Hierarchy
Today’s Modern Compensation Systems
Today the compensation systems are designed aligned to the business goals and
strategies. The employees are expected to work and take their own decisions.
Authority is being delegated. Employees feel secured and valued in the organization.
Organizations offer monetary and non-monetary benefits to attract and retain the best
talents in the competitive environment. Some of the benefits are special allowances
like mobile, company’s vehicle; House rent allowances; statutory leaves, etc.
IMPORTANCE OF COMPENSATION
Compensation and Reward system plays vital role in
a business organization. Since, among four Ms, i.e.
Men, Material, Machine and Money, Men has been
most important factor, it is impossible to imagine a
business process without Men. Every factor
contributes to the process of production/business. It
expects return from the business process such as rent
is the return expected by the landlord, capitalist
expects interest and organizer i.e. entrepreneur
expects profits. Similarly the labour expects wages
from the process.
Labour plays vital role in bringing about the process
of production/business in motion. The other factors
being human, has expectations, emotions, ambitions
and egos.
Labour therefore expects to have fair share in the business/production process. Therefore a
fair compensation system is a must for every business organization. The fair compensation
system will help in the following:
o An ideal compensation system will have positive impact on the efficiency and results
produced by employees. It will encourage the employees to perform better and
achieve the standards fixed.
o It will enhance the process of job evaluation. It will also help in setting up an ideal job
evaluation and the set standards would be more realistic and achievable.
o Such a system should be well defined and uniform. It will be apply to all the levels of
the organization as a general system.
o The system should be simple and flexible so that every employee would be able to
compute his own compensation receivable.
o It should be easy to implement, should not result in exploitation of workers.
o It will raise the morale, efficiency and cooperation among the workers. It, being just
and fair would provide satisfaction to the workers.
o Such system would help management in complying with the various labor acts.
o Such system should also solve disputes between the employee union and
management.
o The system should follow the management principle of equal pay.
o It should motivate and encourage those who perform better and should provide
opportunities for those who wish to excel.
o Sound Compensation/Reward System brings peace in the relationship of employer
and employees.
o It aims at creating a healthy competition among them and encourages employees to
work hard and efficiently.
o The system provides growth and advancement opportunities to the deserving
employees.
o The perfect compensation system provides platform for happy and satisfied
workforce. This minimizes the labour turnover. The organization enjoys the stability.
o The organization is able to retain the best talent by providing them adequate
compensation thereby stopping them from switching over to another job.
o The business organization can think of expansion and growth if it has the support of
skillful, talented and happy workforce.
o The sound compensation system is hallmark of organization’s success and prosperity.
The success and stability of organization is measured with pay-package it provides to
its employees.
Job Analysis
Payroll Home » Compensation » Job Analysis
Job analysis is a systematic approach to
defining the job role, description,
requirements, responsibilities, evaluation, etc.
It helps in finding out required level of
education, skills, knowledge, training, etc for
the job position. It also depicts the job worth
i.e. measurable effectiveness of the job and
contribution of job to the organization. Thus,
it effectively contributes to setting up the
compensation package for the job position.
Importance of Job Analysis
Job analysis helps in analyzing the resources
and establishing the strategies to accomplish
the business goals and strategic objectives. It
forms the basis for demand-supply analysis,
recruitments, compensation management, and
training need assessment and performance
appraisal.
Components of Job Analysis
Job analysis is a systematic procedure to analyze the requirements for the job role and
job profile. Job analysis can be further categorized into following sub components.
Job Position
Job position refers to the designation of the job and employee in the organization. Job
position forms an important part of the compensation strategy as it determines the
level of the job in the organization. For example management level employees receive
greater pay scale than non-managerial employees. The non-monetary benefits offered
to two different levels in the organization also vary.
Job Description
Job description refers the requirements an organization looks for a particular job
position. It states the key skill requirements, the level of experience needed, level of
education required, etc. It also describes the roles and responsibilities attached with the
job position. The roles and responsibilities are key determinant factor in estimating the
level of experience, education, skill, etc required for the job. It also helps in
benchmarking the performance standards.
Job Worth
Job Worth refers to estimating the job worthiness i.e. how much the job contributes to
the organization. It is also known as job evaluation. Job description is used to analyze
the job worthiness. It is also known as job evaluation. Roles and responsibilities helps
in determining the outcome from the job profile. Once it is determined that how much
the job is worth, it becomes easy to define the compensation strategy for the position.
Therefore, job analysis forms an integral part in the formulation of compensation
strategy of an organization. Organizations should conduct the job analysis in a
systematic at regular intervals. Job analysis can be used for setting up the
compensation packages, for reviewing employees’ performance with the standard
level of performance, determining the training needs for employees who are lacking
certain skills.
Pay-Structures
Payroll Home » Compensation » Pay-Structures
Once job analysis has been done organizations need
to decide upon the pay structures. Pay structure
refers to the process of setting up the pay for a job in
an organization. The process deals with internal and
external analysis to estimate the compensation
package for a job profile. Internal equity, External
equity and Individual equity are the most popular
pay structures. Job description provides the in depth
knowledge about the job profile and its worth.
Pay structures are the strong determinant of
employee’s value in the organization. It helps in
analyzing the employee’s role and status in the
organization. It provides for fair treatment to all
employees. Pay structures also include the estimation
of incentives.
The level of incentives also depends on the level of job position in the organizational
hierarchy.
Internal Equity
The internal equity method undertakes the job position in the organizational hierarchy. The
process aims at balancing the compensation provided to a job profile in comparison to the
compensation provided to its senior and junior level in the hierarchy. The fairness is ensured
using job ranking, job classification, level of management, level of status and factor
comparison.
External Equity
Here the market pricing analysis is done. Organizations formulate their compensation
strategies by assessing the competitors’ or industry standards. Organizations set the
compensation packages of their employees aligned with the prevailing compensation
packages in the market. This entails for fair treatment to the employees. At times
organizations offer higher compensation packages to attract and retain the best talent in their
organizations.
Salary-Surveys
Payroll Home » Compensation »Salary-Surveys
Organizations have to bridge the gap between
the industry standards and their salary
packages. They cannot provide compensation
packages that are either less than the industry
standards or are very higher then the market
rates. For the purpose they undertake the
salary survey. The Salary survey is the
research done to analyze the industry
standards to set up the compensation strategy
for the organization. Organizations can either
conduct the survey themselves or they can
purchase the survey reports from a reputed
research organization. These reports
constitute the last 2-5 years or more
compensation figures for the various positions
held by the organizations. The analysis is
done on the basis of certain factors defined in
the objectives of the research.
Objectives of Salary Survey
To gather information regarding the industry standards
To know more about the market rate i.e. compensation offered by the
competitors
To design a fair compensation system
To design and implement most competitive reward strategies
To benchmark the compensation strategies
Types of Compensation Surveys
There are two types of compensation surveys undertaken by the organizations.
Standard Surveys
Standard surveys are undertaken by organizations on a regular basis. These surveys are
conducted annually based on the organizational objectives. These surveys attempt to
cover the same companies every year and provide the same time of analysis. The
reports are published annually by the research organizations. The organizations willing
to formulate their compensations strategies based on the surveys purchase the reports
from the research organization.
Custom Surveys
At times, a few organizations need to know some specific information. The surveys
which cater this need are known as custom surveys. The organizations either higher
research organizations to conduct theses surveys for them or they themselves conduct
the survey by sampling few of the competitors on their own. These surveys do not
have any time interval. They are undertaken as the need arises. They focus on
important issues usually one or two.
Survey Reports
The survey reports consist of the analysis and conclusion drawn from the evaluative
data based on the objectives of the study. The reports also include the data, facts and
figures to support the analysis and conclusion. The supportive data and annexure
provided in the report form the basis for the un-biased conclusion and validation of the
analysis.
