CU MBA SEM IV -COMPENSATION AND REWARDS MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION SEMESTER-IV COMPENSATION AND REWARDS MANAGEMENT

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Nitin Pathak Dr. Manisha Malhotra University School of Business University Institute of Computing © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. CONTENT Unit1 Meaning And Nature Of Compensation ..........................................................................5 Unit2 Types Of Compensation ................................................................................................22 3 CU IDOL SELF LEARNING MATERIAL (SLM)

Unit3 Compensation System Design Issues ............................................................................40 Unit4 Decision About Compensation ......................................................................................58 Unit 5 Strategic Compensation Planning.................................................................................70 Unit6 Determining Compensation ...........................................................................................83 Unit7 Wage Concepts ..............................................................................................................96 Unit8 Job Evaluation Systems ...............................................................................................109 Unit9 Compensation And Variable Pay.................................................................................121 Unit10 Executive Compensation............................................................................................131 Unit11 Retention Strategies ...................................................................................................141 Unit12 Employee Benefits .....................................................................................................154 Unit13 Strategic Compensation Challenges...........................................................................165 Unit14 International Compensation .......................................................................................177 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT1 MEANING AND NATURE OF COMPENSATION STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning of Compensation 1.3 Objectives ofCompensation 1.4Nature ofCompensation 1.5 Practice questions/examples 1.6 Summary 1.7 Keywords 1.8Learning activity 1.9 Unit End Questions 1.10 References 1.0 LEARNING OBJECTIVES After studying this unit, you should be ableto - explain the meaning of compensation. - identify the objectives ofcompensation. - describe the nature of compensation. - outlinebasesofcompensation. 1.1 INTRODUCTION Employee compensation decisions play a vital role in the success of an organization. Considering the revenue perspective alone, effective management and control over 5 CU IDOL SELF LEARNING MATERIAL (SLM)

compensation is very important. It also helps in assessing the scale of employees’ attitudes and behaviour and ultimately the effectiveness of the organization and its various departments with respect to the compensation offered to the employees. Compensation has a direct impact on the key result areas like job satisfaction, stability of tenure, retention, overall performance, skill acquisition and so on. Compensation acts as a tool in various purposes of management according to the organizational goals, needs and available resources. Good and fair compensation strategy enhances optimum utilization of labor resources. For instance, labor resources are often asked to relocate for specific jobs assigned to them. This will be fruitful only if the labor resources are relocated from a low wage area to a high wage area. The benefits of financial incentives make such movements feasible. Fig.1.1 1.2 MEANING OF COMPENSATION Compensation includes any direct or indirect payments to employees such as wages, salaries, bonuses, stock option schemes, perks, incentives, commissions and other fringe benefits. Ehrenberg and Milkovich (1987) have defined pay level as the “average compensation paid by affirm relative to that paid by its competitors”. Compensation is considered as a value-added approach in terms of reward to provide 6 CU IDOL SELF LEARNING MATERIAL (SLM)

monetary benefits to the employees in exchange of their work performed. Fig.1.2 7 CU IDOL SELF LEARNING MATERIAL (SLM)

1.3 OBJECTIVES OF COMPENSATION The basic aim of compensation management is to attract, retain and motivate employees by developing and maintaining competitive and equitable salary structure. It is concerned with: a. The design and maintenance of pay structure. b. The mechanism of salary progression levels and criteria. c. The provision of employee benefits and other allowances. d. The development of a total remuneration policy. The basic aim of compensation management is to attract, retain and motivate employees by developing and maintaining competitive and equitable salary structure. Fig.1.3 Fig 1.1 depicts the determinants of a good compensation policy. The employees should feel secure about the compensation offered to them. A legally fair compensation policy assures the employee about the equitable and cost-effective compensation which helps in effective motivation of the employees. • Compensation should be competitive with what other employers are paying for similar skills or similar jobs. • Compensation paid to various individuals in an organization should reflect the comparative value of their respective contributions to that organization. • Compensation decisions should be made and communicated in a way that is perceived as rational and fair. Compensation and Rewards Management is a multi-faceted concept which serves various 8 CU IDOL SELF LEARNING MATERIAL (SLM)

objectives that can be broadly classified into equity, efficiency, economic stability and optimum utilization of resources. Equity: Equal pay for equally valued work creates internal and external equity in the organization and management. Efficiency: Efficiency objectives act a link between wages and the productivity of the employees. Compensation here, strives motivation in the employees which ultimately results in higher efficiency in the organization. Economic stability: Good compensation policies whether monetary or non-monetary, help in retaining the employees even in the hard phases of economy such as inflation, recession. This contributes in maintaining the economic stability from the employment point of view. Optimum Utilization of Resources: Better compensation packages help in positive environment in the organization culture. Sound and efficient business environment facilitates optimum utilization of resources and eliminate wastes. A sound compensation policy tries to achieve satisfaction for the employees and the employers as well. 9 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig.1.4 For the Employees: a. Equal and fair pay avoids the practice of inequalities of pay scale. b. It avoids favoritism. c. It helps in establishing line and departmental promotion. d. Boosts employee morale and motivation. For the Employers: a. Creates a systematic plan and helps in total control of the turnover of the company. b. It reduces the friction and disputes amongst the employees and grievances over remuneration. c. Attracts suitable talents and skilled employees by ensuring adequate compensations. Objectives of collective bargaining 1. To stimulate and maintain amicable, cordial and peaceful relations between the employer and the employees. 2. To safeguard the interests of both the employer (organisation) and the employees. 3. To retain the government interventions at bay. 4. To promote industrial and organisational democracy. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig.1.5 1.4 NATURE OF COMPENSATION The compensation management is concerned with the financial aspects of needs, motivation and rewards. Nature of compensation interprets the needs of their employees so that reward 11 CU IDOL SELF LEARNING MATERIAL (SLM)

can be individually designed to satisfy the expectations of both employee as well as the employer in the organisation. Fig.1.6 1. Attracts and invites talent: Compensation enriches the labor market by attracting the potential talents of the candidates with fair and attractive pay scales. The candidates often do market research and prefer the best paying employer in the industry. 2. Retains employee: Retention of employees and maintaining stability of tenure is a mutual goal of all the organizations. Equitable and fair compensation policies help in retaining the employees and eliminates absenteeism of the stakeholders of the organization. 3. Used as reward: Compensation is considered as a value-added approach in terms of reward to provide monetary benefits to the employees in exchange of their work performed. Employees are self-motivated if provided with timely and fair monetary rewards. 12 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Cost controls: A systematic framework of compensation policy helps in controlling costs as it avoids the possibilities of under paid and over paid employees. 5. Legal compliance: Organizations are required to set up wage policies as per the Government norms and impositions. Labor Laws and Payment of Wages Act ensure fair remuneration scales and policies of the organization. 6. Helps in developing internal and external equity: Equal pay for equally valued work creates internal and external equity in the organization and management. Developing a just compensation policy takes the employees into confidence to achieve organizational goals connected to the internal and external stakeholders. 7. Creates hierarchy of pay levels: Complying with the legal norms, organizations often tend to create hierarchy of pay levels. This also helps in encouraging the line promotions and departmental promotions. Fig.1.7 8. Recognizes performance and talent management: Effective remuneration policies often encourage the employees to perform well to 13 CU IDOL SELF LEARNING MATERIAL (SLM)

achieve higher levels in the hierarchy. This helps in demonstrations of various talents in the organization. 9. Administrative efficiency: Compensation and rewards management keeps a track of systematic alignment of the productivity and efficiency of the organization with the employee performance and skill acquisitions. This enhances the administrative efficiency. 1.5 PRACTICE CASE STUDY A manufacturer of high-quality engineered tools with approximately 200 employees has experienced high turnover in its sales/marketing management positions. The company realized that it may be under paying the compensation as per the industry levels for its sales executives, to review its sales compensation plan designs to address the acquisition of new ventures and the traditional growth of existing business. There was absence of sales incentives as per the industry norms and the way existing remuneration pattern were going, it created a sense of insecurity as there was lack of uniformity under the compensation schemes. Fig.1.8 14 CU IDOL SELF LEARNING MATERIAL (SLM)

Corrective Steps taken were as follows • Conducted a SWOT analysis of the sales compensation program considering the inventory and analysis of the current program. Timely feedbacks were also taken in consideration with the internal and external data. Fig.1.9 • Implemented updated systems in sales compensation program design. Came up with a new model of KRA determinants for the sales incentive plan system and communications, and conducted a gap analysis between current and desired programs. • Suggested recommendations to increase the impact of the sales incentive plans including: plan design type; incentive and targets; consideration of leverage; performance effectiveness and reward opportunities; payout machinery and system; payouts intervals; etc. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

• A cost analysis was also undertaken to compare the current compensation designs with the proposed designs. • Prepared a communication and implementation program approach and communication techniques to intimate changes to the sales team. The Results Achieved Fig.1.9 • Only after reaching a minimum sales target, incentives were released. • Target sales incentives were developed for every sale role based on appropriate compensation mix. • Target Quotas were designed based on a new methodology. • Developed sales quotations process to reduce unnecessary steps and to increase its effectiveness and efficiency. 16 CU IDOL SELF LEARNING MATERIAL (SLM)

1.6 SUMMARY 1. Compensation includes any direct or indirect payments to employees such as wages, salaries, bonuses, stock option schemes, perks, incentives, commissions and other fringe benefits. 2. The basic aim of compensation management is to attract, retain and motivate employees by developing and maintaining competitive and equitable salary structure. 3. Compensation and Rewards Management is a multi-faceted concept which serves various objectives that can be broadly classified into equity, efficiency, economic stability and optimum utilization of resources. 4. Good compensation policies whether monetary or non-monetary, help in retaining the employees even in the hard phases of economy such as inflation, recession. 5. Nature of compensation interprets the needs of their employees so that reward can be individually designed to satisfy the expectations of both employee as well as the employer in the organisation. 6. Nature of compensation management comprises of attracting talent, reward system, legal compliance, cost control, internal and external equity, creates hierarchy pay levels, etc. 7. Compensation enriches the labor market by attracting the potential talents of the candidates with fair and attractive pay scales. 8. Equitable and fair compensation policies help in retaining the employees and eliminates absenteeism of the stakeholders of the organization. 9. Employees are self-motivated if provided with timely and fair monetary rewards. 10. A systematic framework of compensation policy helps in controlling costs as it avoids the possibilities of under paid and over paid employees. 11. Complying with the legal norms, organizations often tend to create hierarchy of pay levels. 12. Compensation and rewards management keeps a track of systematic alignment of the productivity and efficiency of the business organization with the employee performance and skill acquisitions. 1.7 KEYWORDS • Compensation policies: The rules and regulations of a company to pay remuneration to their employees • Retention of employees: The stability of tenure or working period of an employee in an 17 CU IDOL SELF LEARNING MATERIAL (SLM)

organization • Reward system: A mechanism used award your employees in exchange of their performance • Equitable pay: Fair remuneration as per the similarities of the nature and experience of jobs • Internal and external equity: Fair and just treatment given to the internal and external stakeholders • Monetary benefits: Compensation paid in the of money in exchange of the performance of the employees. 1.8 LEARNING ACTIVITY 1. A food and beverage distribution company in Chicago with around 11,000 employees worldwidehad inefficient compensation structure. The company was in the mode of an acquisition and had no process in place for integrating the acquisitions into its structure. _________________________________________________________________________ _________________________________________________________________________ 2. Enlist the deliverables and corrective steps to formulate a good compensation policy. ________________________________________________________________________________________ _______________________________________________________________________________________ 1.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions: 1. Define compensation as per Ehrenberg and Milkovich (1987) 2. Discuss the objectives of compensation management as per the employee consideration. 3. Discuss the objectives of compensation management as per the employer consideration. 4. What enhances administrative efficiency? 18 CU IDOL SELF LEARNING MATERIAL (SLM)

5. How labor resources will be optimally utilized in terms of compensation management? Long Questions: 1. “Compensation should be competitive with what other employers are paying for similar skills or similar jobs.” Justify the statement with the help of determinants of compensation policies. 2. You are a Human Resource Manager and your organization is facing grievances of unequal pay. Discuss the corrective steps you will take to design a new compensation policy. 3. Explain attracting talent and retention of employees as nature of compensation management. 4. How can a company justify the hierarchy pay level with the help of legal compliance as a nature of their compensation management? 5. On what grounds will the organization face grievances on equity of remuneration? B. Multiple Choice Questions 1. Compensation has a direct impact on the key result areas like a. job satisfaction b. stability of tenure c. retention d. all of the above. 2. Compensation includes any direct or indirect payments to a. organization b. vendors c. employees d. customers 3. Compensation is considered as a value-added approach in terms of reward to provide ____________ to the employees in exchange of their work performed. a. monetary benefits b. non-monetary benefits c. health benefits d. educational benefits 4. The objectives of compensation is concerned with: 19 CU IDOL SELF LEARNING MATERIAL (SLM)

a. The design and maintenance of hierarchy structure. b. The mechanism of departmental levels c. The provision of health benefits d. The development of a total remuneration policy. 5. Compensation decisions should be made and communicated in a way that is perceived as a. Favoritism benefits b. First come first serve basis c. rational and fair. d. Unfavorites benefits 6. Compensation and Rewards Management is a multi-faceted concept which serves various objectives that can be broadly classified into equity, efficiency, ___________ and optimum utilization of resources. a. Inflation rate b. Economic stability c. Equal distribution of wealth d. Social welfare 7. Equitable and fair compensation policies help in _________and eliminates absenteeism of the stakeholders of the organization. a. retaining the employees b. terminating the employees c. motivating the employees d. none of the above Answers 1-d, 2-c, 3-a, 4-d,5-c, 6-b, 7-a 20 CU IDOL SELF LEARNING MATERIAL (SLM)

1.10 REFERENCES Textbook Reference • Richard I. Anderson, Compensation Management in a Knowledge based world, 10th edition, Pearson Education, New Delhi • Er Soni Shyam Singh, Compensation Management, Excel Books, New Delhi Online Reference • http://www.benefitsandcompensationresources.com/case-studies/food-beverage 21 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT2 TYPES OF COMPENSATION STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Determinants of Compensation 2.3 Classification of Compensation or Rewards 2.4Types of Compensation 2.5Responsibilities ofCompensation 2.6 Summary 2.7 Keywords 2.8Learning activity 2.9 Unit End Questions 2.10 References 2.0 LEARNING OBJECTIVES After studying this unit, you should be ableto - explain the types of compensation. - classifycompensation or rewards. - describe the components of compensation. - outlineresponsibilities ofcompensation. 2.1 INTRODUCTION Compensation is often determined by various components. Variety of compensation systems have been designed and developed keeping certain components into consideration. These components more or less universally determine the compensation system of any organizations. 22 CU IDOL SELF LEARNING MATERIAL (SLM)

2.2 DETERMINANTS OF COMPENSATION The factors determining compensation system are as follows: Fig 2.1 Job Descriptions: Job Descriptions outlines the roles, responsibilities, duties, functions, job location, culture of the organization, and other factors of a job profile. The factors help in determining the pay 23 CU IDOL SELF LEARNING MATERIAL (SLM)

scale of the employee on the basis of job description and its potential productivities. Job Analysis: Job analysis techniques include use of questionnaires, interviews, observations of various job descriptions. It helps to identify and evaluate the content of job in exchange of the remuneration offered based on the job description. Fig 2.2 Job Evaluation: Job Evaluation is the most effective way of determining pay structure. Equitable remuneration ethics determined by job evaluation serves as a foundation on providing merit- based incentive programmes. It contributes in reduction in employee grievances and increases the productivity of the employee. Pay Structures: Pay structures help in setting the standards of remuneration for all the employees on equitable 24 CU IDOL SELF LEARNING MATERIAL (SLM)

positions. The practice of collective bargaining helps in pre determining the job profiles with appropriate compensation policies. Fig 2.3 2.3 CLASSIFICATION OF COMPENSATION OR REWARDS Compensation can be termed as money received in exchange of the performance of work, it includes other kinds of benefits and services that the organizations provide to their employees. Reward is anything that attracts the employees’ attention and motivates them to stimulate their work. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.4 Compensation or rewards can be classified into 1. Direct compensation and 2. Indirect compensation. Direct compensation includes direct monetary benefits in terms of cash or kind. This includes basic pay either wage or salary, overtime, bonuses, shares in profits, etc. Indirect compensation includes ESOS for employees, life insurance provided to employees, pensions, allowances for vacations of staff, medical allowances, any other allowance for the betterment of the society. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.5 Apart from the two classifications of compensation given above, there happens to be one more category of compensation which is said to be non-monetary compensation. This compensation is more of a reward-based system. Awards and certificates on achievements, rewards on competitions, upgradation of work place, gift cards and vouchers, paid parking, paid training programmes, workshops and seminars are compensations provided of non- monetary nature. 2.4 TYPES OF COMPENSATION As discussed earlier in the above topic, classification of compensation, we can conclude that compensation is not just paying out salaries or wages to the employees. It considers various other remuneration sources. Let us discuss some of the prominent types of direct compensation. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.6 Base Pay: Base pay is the gross amount that is initially offered to the employee. It is essentially considered to be the minimum amount the employee is entitled to receive pretax and other deductions. It includes employee’s basic salary or wages on hourly or daily basis. The additional amount of compensation offered in exchange of employee’s good performance or any special assignment given to the employee is not included in the base pay. For example, commissions, overtime, incentives are not a component of base pay int the salary structure. The stand out differently in the salary structure of an employee. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.7 A base pay package is of typically 40 hours a week. Base pay also depends on the role of the job, job description and the job analysis. Commission: Commission is a monetary reward given to the employees on basis of their good productivity and efficiency in performance. It is a part of incentive offered to employees that served as a motivational factor for them to perform better. The percentage of commission may vary on the increasing slabs of sales target. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.8 Overtime wages: Overtime wages are the remuneration paid to the employees beyond the working hours or days as stated in the job description. Workers often do overtime on different purposes like need of extra money, extra time required to finish an incomplete task, to achieve desirable results on sales target, etc. The formula to calculate overtime wages depends on the nature of the job and varies from organization to organization. Bonus Pay: Bonus pay is the additional payment on the base pay given to the employee on events like celebrations, super profits earned by the organization or any other great achievements by the team or the organization. According to Payment of Bonus Act, Bonus should be payable at a minimum of 8.33% and a maximum of 20% of the base salary. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.9 Recognition Pay: Recognition pay is a merit pay provided to the employee on their exceptional performance. Recognition pay is a substantial method of organization’s contributions towards employee welfare and motivation. It enhances job satisfaction and a sense of job security in the 31 CU IDOL SELF LEARNING MATERIAL (SLM)

employees. Recognition pay is also given to the employees who have given a good number of years of service to the organization. Stock options: ESOS or Employee Stock Option Schemes are a type of compensation offered to the employees in the form of equity shares of the company. These options give the employees the right to buy the equity shares of the company at a specified discounted rate that is to be matured after a certain period of time given by the company. ESOS benefits the employees in allotment of equity shares at a comparatively lower price than that offered to the general public. ESOS benefits the employers as it helps them in arranging quick funds and maintaining the retention of employees who have been offered stock options. Fig 2.10 32 CU IDOL SELF LEARNING MATERIAL (SLM)

It is often considered to be a good idea to review to employee compensation systems at timely intervals. Rewards of good raise and incentives in alignment with the industry standards proves to be a beneficial step for both, the employee and the organizations to increase the productivity of both the stake holders. Fig 2.11 2.5 RESPONSIBILITIES OF COMPENSATION Responsibilities in compensation administration is very crucial in every hierarchy of management. It helps in determining which assignment should be given to the employee form the executive level to the supervisory and top management level. In a general practice, the personnel manager seldom has complete authority and responsibility for remuneration and compensation administration. Their authority is limited because of the differential functioning of various departments as per the nature of the job and roles of the department scrutiny. Formulation of compensation policy is thus generally retained with the top management. This is because they ensure conformity of the techniques and procedures of the company policy. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

However, there are certain responsibilities that of the personnel or the compensation manager which helps in developing and evolving the organization’s pay structure, determining competitive wage rates and changes, ensure the legal compliances of the organization with various compensation acts, monitoring the pay distribution to the employees. Fig 2.12 The line managers are given the responsibility of making pay decisions that lies within the framework of company policies, techniques and practices. They have a very important role to play in compensation policy formulation as they are the nearest with the core of the job design with the employees justifying their given job description. Line managers often give constructive suggestions to improve remuneration policy administration. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.12 The role of wage and staff specialist is vital in conducting the research of wage and salary administration. The research work consists of assignments such as compensation surveys, reports, company control administration policies, investigation of compensation programmes and policies, practices and techniques of compensation policies used by various organizations in the similar industries. The researches carried out by the wage and staff specialists help in developing the wage and salary policies, programmes, plans and procedures. This also helps in assisting the line managers at all the levels in implementing the wage programmes, advising the managers in counselling and redressals of compensation grievances. The latest responsibility in compensation administration lies with the department of audit and control. This helps the compensation system to be in lieu with the compensation and payment acts as provisioned by the government. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

2.6 SUMMARY 1. The components more or less universally determine the compensation system of any organizations are job description, job analysis, job evaluation, pay structure. 2. Job Descriptions outlines the roles, responsibilities, duties, functions, job location, culture of the organization, and other factors of a job profile. 3. Job analysis techniques include use of questionnaires, interviews, observations of various job descriptions. 4. Equitable remuneration ethics determined by job evaluation serves as a foundation on providing merit-based incentive programmes. 5. Pay structures help in setting the standards of remuneration for all the employees on equitable positions. 6. Direct compensation includes direct monetary benefits in terms of cash or kind. This includes basic pay either wage or salary, overtime, bonuses, shares in profits, etc. 7. Indirect compensation includes ESOS for employees, life insurance provided to employees, pensions, allowances for vacations of staff, medical allowances, any other allowance for the betterment of the society. 8. Awards and certificates on achievements, rewards on competitions, upgradation of work place, gift cards and vouchers, paid parking, paid training programmes, workshops and seminars are compensations provided of non-monetary nature. 9. Base pay is the gross amount that is initially offered to the employee. It is essentially considered to be the minimum amount the employee is entitled to receive pretax and other deductions. 10. Commission is a monetary reward given to the employees on basis of their good productivity and efficiency in performance. 11. Overtime wages are the remuneration paid to the employees beyond the working hours or days as stated in the job description. 12. Bonus pay is the additional payment on the base pay given to the employee on events like celebrations, super profits earned by the organization or any other great achievements by the team or the organization. 13. Recognition pay is a merit pay provided to the employee on their exceptional performance. 14. ESOS or Employee Stock Option Schemes are a type of compensation offered to the employees in the form of equity shares of the company. 15. Responsibilities of the personnel or the compensation manager are developing and evolving the organization’s pay structure, determining competitive wage rates and 36 CU IDOL SELF LEARNING MATERIAL (SLM)

changes, ensure the legal compliances of the organization with various compensation acts, monitoring the pay distribution to the employees. 16. The line managers are given the responsibility of making pay decisions that lies within the framework of company policies, techniques and practices. 17. The researches carried out by the wage and staff specialists help in developing the wage and salary policies, programmes, plans and procedures. 18. The latest responsibility in compensation administration lies with the department of audit and control. 2.7 KEYWORDS 1. Direct compensation: direct monetary benefits in terms of cash or kind. 2. Indirect compensation: indirect monetary benefits including allowances. 3. Bonus pay: the additional payment on the base pay given to the employee on events. 4. ESOS: Employee Stock Option Schemes 5. Equity Shares: a type of share allotted by the company that enjoys voting rights. 6. Stakeholders: People parties involved in the organization. 7. Personnel manager: Human Resource Manager 8. Line managers: Departmental managers or supervisors 9. Audit: Verification of financial accountings of an organization. 10. Policy Formulation: writing down the rules and regulations of a system. 2.8 LEARNING ACTIVITY 1. An educational institution has staff of different job profiles. There are full time main teachers, visiting faculties, contractual housekeeping staff, outsourced vendors for canteen, security guards. Classify the employees of this educational institution on the basis of different types of compensation. Justify your classification with suitable reasons. ___________________________________________________________________________ ___________________________________________________________________________ 2. What are the other factors that determine a wage? ________________________________________________________________ ________________________________________________________________ 37 CU IDOL SELF LEARNING MATERIAL (SLM)

2.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions: 1. What are the determinants of compensation? 2. Explainany two of determinants of compensation. 3. What is meant by recognition pay? 4. How is bonus different from commission? 5. Differentiate between direct and indirect compensation. Long Questions: 1. Compensation or rewards can be classified into how many types? 2. Explain indirect compensation with examples. 3. Explain the types of compensation under direct compensation. 4. Identify the roles and responsibilities of a line manager in compensation administration. 5. Why doesn’t the personnel manager seldom have complete authority and responsibility for remuneration and compensation administration? 6. Explain the role of wage and staff specialist in detail. B. Multiple Choice Questions 1. ______________ techniques include use of questionnaires, interviews, observations of various job descriptions. a. job evaluation b. job analysis c. job rotation d. job profile 2. _________ help in setting the standards of remuneration for all the employees on equitable positions. a. job evaluation b. job analysis c. job rotation d. pay structures 38 CU IDOL SELF LEARNING MATERIAL (SLM)

3._____________ includes direct monetary benefits in terms of cash or kind. This includes basic pay either wage or salary, overtime, bonuses, shares in profits, etc. a. non-monetary compensations b. direct compensation c. indirect compensation d. monetary compensation 4.A base pay package is of typically ____ hours a week. a. 40 b. 28 c. 56 d. 32 5. Bonus should be payable at a minimum of ____and a maximum of 20% of the base salary. a. 7.14% b. 3.50% c. 8.33% d. 50% Answers 1-b, 2-d, 3-b, 4-a, 5-c 2.10 REFERENCES Textbook Reference: Wages and Salary Administration by A. M. Sharma Online References: • https://blog.greythr.com/payment-of-bonus-act-applicability-calculation-eligibility • http://www.banktheories.com/2015/09/job-analysis-job-evaluation-job.html 39 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT3 COMPENSATION SYSTEM DESIGN ISSUES STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2Compensation system design issues 3.3 Compensation philosophies 3.4Compensation approaches 3.5 Summary 3.6 Keywords 3.7Learning activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you should be ableto - explain the meaning of compensation system. - classifycompensation philosophies with compensation approaches. - implement the philosophies of compensation. - outlinecompensation system design issues. 3.1 INTRODUCTION Meaning Of Compensation System Compensation system is a mechanism and technique which includes total remuneration policies of an organization, including both monetary and non-monetary benefits. A fair and equitable compensation system determines the productivity and efficiency of the employees in an organization. Compensation system involves managing, determining, formulating, analyzing and implementing the compensation policies in the organization in lieu with the personnel management. 40 CU IDOL SELF LEARNING MATERIAL (SLM)

Compensation system design should be carefully be planned out keeping the goals of the organization into consideration and ensure it doesn’t affect the company policies in any negative aspect. Fig 3.1 Compensation system administration 3.2 COMPENSATION SYSTEM DESIGN ISSUES One of the most prominent issue under compensation administration is laying down a fair and equitable compensation system. Though system might have simpler objectives but the process to design the system is often a complex one. The employer’s motive is primarily concerned with the productivity of the organization however the employees emphasize on receiving higher remuneration to align with the inflator cost of living index. The compensation design issues have been prevailing in the past and will trend in the future. Thus, organizations lay additional focus of designing equitable 41 CU IDOL SELF LEARNING MATERIAL (SLM)

compensation system. There are questions raised on the level of compensation rates in the various departments and areas of the organization. Disputes between the management and the trade unions over wages and salaries are a part and parcel of conflicts over compensation systems. These disputes are majorly on the issues of take-home pay or net pay and the percentage of deductions in the gross salaries. Any efficient compensation system design should consider determinants of fairness, internal equity, interactional, privacy, transparency and effective distributional. Fig 3.2 In the context of salary and tax planning, organizations have considered perks, incentive and fringe benefits that could compensate the deductions in the gross pay of the employee. Building compensation designs on the team concept also becomes a matter of concern for the organizations. Problem arises on the rewards between individual vs team achievements. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 3.3 The compensation system design issues can be resolved by collective bargaining through the following ways. Cooperative Process The bargaining is collective processas all the workers bargain and negotiate through their representatives for their mutual interests and benefits.Both the employer and employees act as an assembly rather than as individuals. They mutually arrive at solutions. 2. Equivalent Strength Both parties’ bargain from a situation of equivalent strength.In other words, the negotiating power of both parties is equal. 3. Strategic Collective bargaining has advanced from an expression of strength to one where an urbane strategy is needed. 43 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Flexibility Collective bargaining is not a one-way road.It is a give and take process.Both workforces and management disburse their energies to arrive at an agreement.It has adequate flexibility since no party can afford to be inflexible and unbending in such situations. 5. Voluntary by Nature Collective bargaining is a voluntary activity as it is not obligatory by any law.The parties also go for collective bargaining for larger welfares. They voluntarily have an expressive dialogue on various worrying issues.They try to review each other’s views. They also executive the agreement voluntarily. 6. Dynamic Collective bargaining is a dynamic process since the way agreements are, the process of negotiation, and the rational state of the parties involved keep changing. 7. Continuous Process Collective bargaining does not start with discussions and end with an agreement. It includes many prenegotiations activities and also further discussions. 8. Power Relationship It is a power relationship in which organization tries to hold its right to manage and the trade unions try to safeguard their interest to reinforce its hold over the workers. 9. Process of Persuasion Collective bargaining is the mutual process of convincing, reasoning, and persuasion which enables the parties to come at an amicable settlement or agreement. Employees generally want to get the maximum benefits and employers want to give the least but optimum solutions. 10. Relation of Giving and Taking 44 CU IDOL SELF LEARNING MATERIAL (SLM)

Collective bargaining is an exchange of behaviours, attributes and thoughts. Both parties behave thoughtfully rather than forcefully applying rules on the employees. 3.3 COMPENSATION PHILOSOPHIES Compensation philosophy is a formally written statement describing the compensation and reward strategies of an organization in the welfare of its employees. It justifies the compensation system of the organization. The human resource department along with the HRM specialist lay down compensation philosophies in lieu with the company policies and procedures. A well formulated compensation policy determines the transparency and the commitment of the organizations towards fair employee remunerations. Fig 3.4 45 The basic types of compensation philosophies are as follows: Market Pay: CU IDOL SELF LEARNING MATERIAL (SLM)

The compensation determined on the difficulty level of the job description as per the market and industry standards. Equal Pay: Fair and equitable wages are provided to the employees irrespective of their positions and difficulty level of their jobs. Flexible Pay: The top management of the organization determines remuneration as per the employee’s capabilities and experiences. This method considers the performance appraisal and potential appraisals of the employee. Tailored Pay: Remunerations combining of perks, incentives, commissions on the basis of increasing performance of the employees. Factors determining compensation philosophies: • Financial position of the company • Nature and size of the company • Type of the industry • Company’s mission and vision • Remunerations offered by the competitors to their employees • Talent acquisition levels 46 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 3.5 Importance of Compensation Philosophy • Attracts skilled candidates: By sharing and publishing remuneration in the vacancy adds, the organization can attract more talent as per the efficacy of the job profile. According to a recruitment specialist, an organization can attract up to 30% of appropriate applicants if the compensation philosophy is mentioned in the job post. • Retention of employees: Employee turnover is majorly affected by job satisfaction. Transparency in the compensation philosophy enhances the essence of job assurance and increases the job satisfaction of the employees. • Drives motivation: 47 CU IDOL SELF LEARNING MATERIAL (SLM)

A strong compensation philosophy drives motivation in the employees in terms effort and reward relationship. Organizations with value added approach on the compensation boosts employees’ morale to deliver better performance. Fig 3.6 Ways to write a compensation philosophy • Compensation package: A compensation package includes both monetary compensation (bonus, salary, allowances) and a few non-monetary benefits (life insurance, pension plan, vacations, etc.). Compensation philosophy should be a good balance between both the monetary and non- monetary benefits. • Percentile pay: A percentile pay is the certain percentage of the total employees in an area earning a specific amount. For instance, if 25% employees of a similar job in the industry are earning more than 30k a month, the organisation may or may not consider this percentile to pay its employees depending on the nature of the job. • Fixed Numbers: A fixed amount is stated in the compensation philosophy for each position in the organization. Regular increment percentages are also mentioned in the compensation philosophy. This method often helps in attracting appropriate talent as per the prescribed pay. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

• Non-Specific: Under this method, compensation philosophy considers the employee competencies and other aspects to determine the remuneration of the employee. Nonspecific method is the most flexible method of compensation philosophy. Example of compensation philosophy 3.4 COMPENSATION APPROACHES If a compensation design has to serve a positive motivational environment, it is very essential to adopt right approach towards compensation system. There are two very common compensation approaches practiced by the organizations all over the world. They are 49 CU IDOL SELF LEARNING MATERIAL (SLM)

Traditional approach and Total Rewards approach. Fig 3.7 Traditional Approach: It focuses on taking base pay as the primary component of the salary structure. Value added monetary benefits like bonus and fringe benefits are given only to the executives and employees with long tenure in the organization. Promotions are often based on the promotion and growth of the organization. Traditional approach has a universal compensation plan for all the employees in the organization. 50 CU IDOL SELF LEARNING MATERIAL (SLM)