Compensation Management

Employee compensation is of one the major determinants of

employee satisfaction in an organization. The compensation
policy and the reward system of an organization are viewed
by the employees as indicators of the managements attitude
and concern for them. It is not just the compensation in
toto, but its fairness as perceived by the employees that
determines the success of a compensation management
system. Hence, it very important for the management to
design and implement its compensation system with utmost
care and tact. A good compensation system should be able
to attract and retain employees, give them a fair deal, keep
the organization competitive and motivate employees to
perform their best.

Objectives:
The primary objective of job evaluation is to determine the relative worth of
different jobs in the organization and provide the basis for the
compensation management system. The other objectives are:

to determine the position and place of a job in the organizational hierarchy.

to clarify the responsibility and authority associated with each job.

to manage internal (between different jobs in the organization) and

external (between similar jobs in other organizations of the industry)
consistency in the compensations.

to maintain complete and accurate data relating to job description and job
specification of various jobs.

to ensure employee satisfaction with respect to the compensation.

to avoid discrimination of any kind in wage administration.

to provide the basis for classification of new or changed jobs.

Principles of Job Evaluation

The job dimensions have to be properly selected and

should be rated in accordance with the demands of the
job.

The dimensions selected for the purpose of rating should

be clearly defined to ensure clear understanding by the
employees.

The evaluation program should be explained and

illustrated to the employees at all levels. The employees as
well as the supervisors should have confidence in the
system of evaluation.

The employees must be actively involved in the evaluation

program. This helps develop a sense of trust in the whole
exercise.

Market factors should be taken into consideration while

evaluating jobs. For example, if there is a scarcity of geophysicists in the job market, this fact has to be given due
importance while evaluating the job of a geo-physicist.

Process of Job Evaluation:

The various steps involved in a job evaluation exercise are outlined below:
Preparation of a Job Evaluation Plan - The need for job evaluation is determined and a
detailed plan of how to go about the whole exercise.
Job Analysis- Job analysis helps in understanding the tasks and responsibilities associated
with a job and the competency set required to perform the tasks and fulfill the
responsibilities.
Job Description and Job Specification - Job description is a compilation of the tasks,
duties and responsibilities associated with each job in the organization. Job specification, on
the other hand, is a compilation of the knowledge, skills and attitudes required to perform
each job successfully. These two steps help in evaluating job.
Selection of job dimensions -The different factors which will be the basis for evaluating
each job, have to be determined. Once these dimensions are selected, monetary values have
to be attached to each of these jobs after proper assessment.
Classification of jobs - The monetary value of each job is a reflection of its contribution to
the organization and its significance. Jobs are classified in sequential order on the basis of
the monetary values attached to them.
Implementation of the evaluation - The employees should be educated about the program
to make them understand the basis and the procedure of job evaluation. Then, the results of
the evaluation exercise are put to use.
Maintenance - The results of job evaluation have to be updated and modified from time to
time to match the changing organizational needs and job profiles.

Techniques of Job Evaluation

Quantitative and non-quantitative techniques are used to compare jobs in an
organization for the purpose of classifying them and attaching monetary
values to them.
Non-Quantitative Techniques:
The two types of non-quantitative techniques are the ranking and the job
grading methods.
(i) Ranking:
Ranking is one of the simplest and the oldest job evaluation methods. In this
method, the jobs in an organization are assessed based on the knowledge,
skills, effort and other job dimensions associated with each job. Ranking
involves preparation of brief job descriptions and assigning ranks to the jobs
in accordance with their worth in the organization. Though it is the simplest,
it is not often used because this method does not have an objective and
concrete basis of evaluation.
CONTD.

Several techniques o ranking are used in the process of job evaluation.

Relative Ranking - Since it is difficult to rank all the jobs at a time under
the simple ranking method, a method of relative ranking is adopted. In
this method, a key or representative job is identified and its worth is
determined. Subsequently, the relative importance of each job in
comparison with the representative is determined and then ranked.
Paired Comparison - In this technique, each job is compared with every
other job in the organization. After this comparison in pairs, the jobs
are ranked. This is similar to the paired comparison method of ranking
employees in performance appraisal.
Single Factor Ranking -In this method of evaluation, the single most
important factor/dimension of a job is identified and compared with the
single most important factor/dimension of other jobs. This simplifies
the exercise of job evaluation.
CONTD.

ii) Job classification or job grading:

Analyzing the organizational structure and its chief characteristics. For

example, determining whether the organization is a functional or a matrix
organization.

Determining the job dimensions/factors, for the purpose of defining grades.

Defining and determining the job grades as Grade I, Grade II and so on,
based on the job dimensions and the organizational structure.

Classifying the jobs of the organization under different grades in accordance

with the grade definitions.

Using inputs from employees and trade union representatives regarding the
number of grades, grade description and job classification.

Freezing the grades and assigning monetary values to the key grades, and
then to all other grades.
CONTD.

Advantages

Job evaluation using the grading technique is supported by the job

description and the grade definition.

It is a simple technique as is quite easy to understand, once the grade

definition and job classification exercise in complete.

It is inexpensive and provides a systematic understanding of the

organization structure based on grades.

After the grades are established, any changed job or new job can be easily
evaluated.

It is comparatively more comprehensive than the ranking method as it

provides grades and grade description/definition for various classes of jobs.

Disadvantages

It is a cumbersome method as the definitions of grades have to cover

different jobs from different functions. For example, a grade covering the
job of a human resources officer should also cover the job of a finance
officer.

Quantitative Methods
(i) Point rating method
The point method or the point rating method is one of the most widely used methods of
job evaluation. In this method, a quantitative point scale is developed to evaluate the
jobs. However, different scales might be required to evaluate different jobs. For
example, all the managerial jobs might be evaluated on one scale, all the
operational/line jobs on another and all the clerical jobs, perhaps on a third one. The
number of scales to be used and other aspects of implementation are determined by the
job evaluation analyst or the human resources function. The different steps in the point
rating method are:
Determine the job factors or compensable factors - Job factors or compensable factors
are those characteristics of a job which are deemed important by the organization and
which are present in all the jobs to be evaluated. A significant sample of jobs is taken
and their job description and specification prepared to determine the job factors.
Determine the subfactors - The job factors are very generic in nature and have a broad
meaning. These are therefore subdivided into 'subfactors', which are specific to the job
being evaluated. For example, engineering knowledge might be a job factor while
dexterity might be a subfactor for the job of a maintenance engineer.
CONTD.

Define the degree statements or profile statements: Degree statements describe the
specific requirements of each subfactor. They are in the form of written phrases and
determine the degree of importance associated with each subfactor. There are
normally up to five degrees associated with each subfactor.
Assign points to factors, subfactors and degrees- On the basis of the importance of
each factor, subfactor and degree in the job, points are assigned to them. For example,
if "experience" is critical to a job, degree I might be 20 points (experience of less than
6 months), degree II might be 40 points (6 months to one year), degree III - 60 points
(1- 2 years), degree IV - 80 points (2-3 years) and degree V 100 points (more than 3
years). The maximum points that can be allotted to each job are fixed and these
points are distributed across different job factors.
Preparation of a chart A chart is then prepared, with the values for each factor and
subfactor, broken down into degrees present, with clear, agreed definitions of the
subfactors and degrees.
Applying the point system In the final stage, the experts compare the job description
of each job with the description given in a standard point manual and determine the
final points and level of each job. The points then help in determining the pay scale
of each job. Total points should match the rank ordering of the key jobs according to
pay.
CONTD.

Advantages

The system is accurate and dependable

It can be used for a relatively long time, with timely updates, if properly
designed.

Wage differentials are likely to be systematic and in accordance with the

content of each job.

Disadvantages

It is a complex and time-take assignment.

This method involves high costs and a lot of clerical work.

CONTD.

ii) Factor comparison method

This is a sophisticated and quantitative technique of job evaluation. It is based on
the principles of point rating and ranking, and is similar to the point rating
method. The factor comparison method proceeds in the following steps:
The first step is to determine and define the specific factors across different jobs.
Between four and seven broad-based factors are chosen.
The second step is to identify the key jobs or benchmark jobs, which are well
known and have established pay rate in the organization. These jobs should
contain the factors determined in the previous step.
The factors in each benchmark job are compared and ranked, based on their
relative importance. This is called factor comparison.
The factors are then assigned monetary values and the sum of the monetary values
assigned should add up to the pay of the benchmark job. This is called factor
evaluation. Any differences between factor comparison and factor evaluation
should be properly reconciled.
The remaining jobs in the organization are then evaluated based on this evaluation
of the benchmark jobs. The factors for each job are ranked and then evaluated as
has been done for the benchmark jobs. An understanding of the emerging pattern
of rankings and values makes the exercise faster and easier.
CONTD.

Advantages

It is an analytical and quantitative method and is reliable.

It is an objective and logical method in which the monetary values are

assigned based on the factor ranking.

It is easy to explain this method to supervisors, employees and unions.

Disadvantages

It is a very cumbersome and complex method.

In case of a mismatch between the factor comparison and factor ranking,

the exercise has to be started from the scratch again.

There is a strong dependence on the benchmark or key jobs. These key

jobs may not always be relevant. If the key jobs in the firm change, the
base rate evolved for earlier key jobs cannot be used as standards for
newer types of jobs.

Decision Band Method

The Decision Band Method or the DBM has been used successfully in
public and private organizations throughout the world for over 25 years,
but is not a conventional method of job evaluation. DBM is a unique
approach to job evaluation, originally developed by Professor Emeritus
Thomas T. Paterson in the 1970's, and further developed and refined by
Ernst & Young's Compensation Specialists for application in client
organizations.
The basic premise of DBM is that the value of a job depends on its
decision-making requirements. Decision-making is a logical and equitable
basis for comparing jobs, because all jobs require the incumbents to make
decisions of some kind in order to perform their jobs - whether they are
line or staff, supervisory or non-supervisory, union or non-union.

Advantages of Job Evaluation

a.

Job evaluation is a logical and objective method of ranking and

grading jobs for the purpose of compensation management.

b.

It helps to prevent and remove discrepancies in the wage structure of

an organization. This makes wage administration simpler and more
uniform.

c.

Job evaluation can explain logically any issue relating to wage

differentials in an organization. This helps in maintaining high worker
satisfaction levels and sound industrial relations.

d.

Job evaluation facilitates the entry of new jobs into the organizational
wage structure. The new jobs can be evaluated using appropriate
evaluation techniques and their pay structure can be fixed accordingly.

e.

Job evaluation helps in comparing the organization's wage structure

with the competitor's wages and market rates.

f.

The information collected for job evaluation can be used for decisions
related to selection, transfer and promotion of employees.

Limitations of job evaluation

Changing technologies and systems bring about a changes in jobs and therefore
in job factors. These changes can render the job evaluation techniques outdated
and irrelevant.
If not properly formulated or implemented, job evaluation can give rise to
employee grievances. For example, if a job higher in the hierarchy, is rated
lower than a job lower in the hierarchy, the employees concerned might express
their dissatisfaction.
Job evaluation introduces rigidity into the pay system and reduces opportunities
for managers to exercise discretion.
Job evaluation takes a long time to implement, and may involve some
formalization of rules. This may sometimes lead to a mismatch between the
financial condition of the organization and the established wage structure.
Job evaluation committees sometimes have to compromise to accommodate the
views and demands of different interest groups like the management, unions and
employees.

Concept of wage and salary administration

Base wages and salaries are defined as the hourly, weekly
and monthly pay that employees receive for their work in
an organization. It is on the basis of these that employees
judge the fairness of the pay system. Base wage and salary
are the foundation of employee pay structure, and total
compensation is calculated after these are fixed. The total
compensation of an employee includes other elements like
incentives and benefits. The system of compensating
employees in a fair manner, maintaining the principle of
equity and matching employee expectancy, is called
compensation administration.

A. Principles Governing Compensation Administration:

The principles that govern the compensation administration, and therefore the
wage and salary administration in an organization, are given below:

Maintaining equity in the distribution of wages and salaries in the

organization;

Maintaining competitiveness in the wage market, in comparison to other

players in the industry;

Matching employee expectations;

Reinforcing positive employee behavior and contribution to the organization;

Eliminating any discrepancies in wage administration in the organization;

Devising a system that is the most efficient for the organization;

Optimization of management and employee interests;

Maintaining good industrial relations and harmony, with respect to

compensation.
CONTD.

B. Purpose of Wage and Salary Administration

The basic purpose of a salary or a compensation administration in an organization is to
satisfy employees' needs and to meet their expectations in order to motivate and retain
them. The other purposes are explained below.
a.

Attracting talented resources - A competitive compensation system helps in attracting

good talent from the job market. Premium salaries can be offered to attract high performers
from competing organizations. A competitive salary is very useful especially when there is
a high demand for a particular trade or skill.

b.

Retaining and motivating employees - A fair and rewarding compensation can help in
retaining employees and motivating them to perform better. The positive contribution of the
employees should be reinforced through appropriate rewards.

c.

Financial management - A rational compensation system helps the, management reduce

its costs in terms of employee turnover and ensures better returns on investment. The wage
bill can also be kept reasonably low by judicious salary administration.

d.

Legal requirements - Laws relating to employment require an organization to have a

proper system to pay employees for their contribution. An organization spread over several
countries or states, also needs to comply with the different laws in different parts of the
world. For example, the minimum wage in one country might be different from the
minimum wage in another. It is the responsibility of the organization to ensure equity in
compensation administration while abiding to the laws of the countries it operates in.

Concepts of Different Wages

As discussed earlier, wage forms the basis for the calculation of the
compensation of an employee. The concept of wage has had different
meanings over the centuries. The various types of wages are discussed
below:
Minimum wage
It is the amount of remuneration, which is just sufficient to enable an
average worker to fulfill all his obligations. It can be either the minimumpiece rate or minimum-time rate. It is fixed by the government and
enforced by the law with respect to all the scheduled employments, and
is revised at least once in 5 years based on the consumer price index. The
current minimum wage in India is Rs. 50 per day to all the workers in
scheduled employment. It is applicable to workers across the country and
is governed by the Minimum Wage Act, 1948.

CONTD.

Minimum wages" are fixed on the basis of six norms or

components, viz.
i.

In calculating the minimum wage, the standard working class

family should be taken to consist of 3 consumption units for
one earner; the earnings of women, children and adolescents
should be disregarded.

ii.

Minimum food requirement should be calculated on the basis

of net intake of calories, for an average Indian adult of
moderate activity.

iii. Clothing requirements should be estimated at per capita

consumption of 18 yards per annum which would give for the
average worker's family of four, a total of 72 yards.
iv. In respect of housing, the rent corresponding to the minimum
area provided for, under Government's Industrial Housing
Scheme, should be taken into consideration in fixing the
minimum wage.
v.

Fuel, lighting and other miscellaneous items of expenditure

should constitute 20% of the total minimum wage

vi. Children's

education,

medical

requirements,

minimum

Fair Wage:
Worker performing work of equal skill, difficulty or unpleasantness
should receive equal or fair wages. Fair Wages should also take
into consideration the financial capacity of the employer. Fair wages
may therefore be higher than minimum wage level but never lower
than its. In India, the Fair Wages Committee recommended that fair
wage should be less than the living wage and more than the minimum
wage. The recommendations of the Committee regarding fair wages
are:

The basis of fair wage is the minimum wage, within the capacity of
the organization to pay.

Fair wage should be related to the productivity of the labor.

It should match the prevailing rates of wages in the same or

neighboring localities.

It should reflect the level of national income and its distribution.

Basic Wage Plans:

a)

Time wage plan

b) Piece wage plan

c)

Skill-based pay

d) Competency based pay

e)

Broadbanding

Variable Compensation
Variable compensation programs are designed to pay employees in
accordance with their performance and not in accordance with their
position in the organizational hierarchy. These programs are designed to
motivate individuals and groups that contribute effective, as they
differentiate between performers and non-performers.

Executive Compensation
Executive compensation is the compensation paid to the CEO or the top
executives of an organization.

The following process can be adopted by an HR department to design

an effective and efficient executive compensation plan
1.

Review the existing executive compensation plan

2.

Analyze the organizational objectives

3.

The plan should provide for retaining a competent and

successful executive for a longer period of time.

4.

The funding of the executive compensation and other factors

should be taken care of.

5.

The final plan should be prepared, with all the various

components, their range, the related targets to be achieved and
the final compensation.

6.

The executive compensation plan should be made known to all

the stakeholders.

Wage Differentials
Wage differentials can be defined as the difference in wages paid for same
or similar work because of various reasons like differences in work
schedules, hazards involved, cost of living, or other factors. Wage
differentials can exist at various levels, i.e. individual, organizational,
occupational or industry level and regional level.

National Wage Policy

The 8th Five Year Plan says that it is felt necessary that a national wage
policy is evolved towards the direction of removing irrational and
inequitous disparities in wage and salary levels and inducing efficiency
in the wage system in the country. This would also help to streamline
institutional mechanisms for wage fixation and also help in dealing with
wage-related problems in the unorganized sector.
Though it is desirable to have a National Wage policy, it is difficult to
conceive of the concept in practical terms. In the Indian scenario,
because of the diversity across different regions and societies, it has not
been possible so far, to evolve a common national wage policy.

Theories and surveys for wage and salary administration

Wage and salary fixation in a country is based on wage theories like
the wage fund theory and salary surveys like the Occupational wage
Survey (OWS). Wage theories like the Minimum Wage Theory still
guide the fixation of minimum wages for daily laborers. The different
theories have been discussed under Concepts of Minimum Wage,
Living Wage and Fair Wage. The contemporary theories however
discuss the role of the worker too in wage fixation. The Bargaining
Theory of Wages states that the bargaining powers of the employer and
the employee determine wage fixation. Behavioral scientists in fact
suggest that the size, nature, culture and perception of the organization,
the bargaining power of the unions, the local and social norms, desired
employee performance etc., all have an impact on the wage and salary
administration in an organization.

Wage fixing institutions and authorities

Most wage determinations are done through the process of
collective bargaining or negotiation between the management
and the workers. This is a very interesting exercise to watch as
both the parties start their bargaining well beyond their
expected goal. At the same time, they have a good estimate of
the opposite partys settlement value.

Concept of Rewards
Extrinsic rewards are tangible in nature and are normally under the
control of the organization.
Intrinsic rewards are intangible in nature and are internal to the
individual.
Rewards can also be classified into financial and non-financial.
Financial rewards are the rewards that employees receive in monetary
terms.
Non-financial rewards are intangible and are paid in kind.

Types of Incentive Plans

Short-Term Plans:
1)

Halsey Plan: This plan tries to eliminate the limitations of time and piece rate
systems while trying to combine their merits. Under this plan, a certain amount of
work is fixed as a standard output, which is to be completed in a prescribed time.

2)

Rowan Plan: Under this plan, the owner is guaranteed a minimum wage on a time
basis. Then, a standard time is fixed for the completion of work and if the worker
completes it before time, he earns more for the time saved.

3)

Barth System of Wages: In this system, the workers are not guaranteed of a minimum
rate. Wages are calculated as
Wage = Standard time Time taken Hourly rate

4)

Task Bonus Systems: This method of incentive payment is generally used for groups.

5)

Point-rating system: Under this system, each job is rated in terms of a standard time.
At the end of a specified period, a day or a week, the output of each worker is
assessed.

6)

Progressive Bonus: Under this system of incentive payment, the earnings increase at
a progressive rate once the output crosses the minimum or standard output.

Long-Term Plans
1) Annual bonus
2) Profit-sharing
a) Distribution plan
b) Deferred plan
c) Combination plan
3) Gain-sharing
4) Employee Stock Plans

Non Monetary Incentives

i)

Recognition of an employees contribution

ii)

A Challenging assignment

iii) Giving additional responsibility

iv) Rewarding an employee for his performance through free gifts or
free vacations
v)

Awards, as a form of incentive, for exceptional performance

Guidelines for effective incentive plans

For an incentive plan to be effective as an employee retaining and motivating tool, it has to
have the following characteristics.
i.
The incentive plan should be linked to employee performance. This would improve
the organizational performance and contribute to the employee morale too.
ii. The incentive plan should be communicated to the employees clearly. There should
be transparency and the employees should view the system as being fair and
rewarding performers.
iii. Employee suggestions and inputs should be valued and rewarded. The incentive
should be proportional to the contribution of each employee.
iv. The incentive plan should be minimally affected by external factors like the stock
market performance and the industry's performance.
v. The incentive plan should be flexible enough to accommodate changes in external
factors. Companies should upgrade their incentive plans as the environment changes.
vi. The incentive plan of an organization should provide a challenge to the employees to
gear up their performance levels.
vii. The organizational incentive plan should also benefit the management with tangible
savings in labor costs.
viii. The incentive plan should only add value and not have a negative influence on the
bottomline of the company.
ix. The incentive plan should include both monetary and non-monetary incentives Jar
employees.
x. It should be possible to measure the value of the non-monetary incentive plans.

Employee Benefits

Free or subsidized lunches

Medical facilities
Paid holiday/vacation
Retiral benefits like PF and gratuity
Employee insurance
Maternity leave
Child-care centers
Educational allowance for employees children
Merit Scholarships for employees children
Company accommodation
Company transportation facilities
Cafeteria and rest rooms
Study leave
Company sponsored study
Club membership
Recreational facilities
Credit cards
Business and Professional memberships
Tax assistance
Other assistance
Interest-free loans

Objectives of Employee Benefits

Some of the basic objectives of a benefit program are:
1.

To provide employees special allowances to match the growing cost of

living, to provide them social security and to improve the quality of their
work life

2.

To reward employees for their employment with the organization and grant
them special privileges for holding a particular position.

3.

The unions expect some benefits from the management and satisfying the
unions demands helps in maintaining harmonious industrial relations

4.

From the organizational point of view, employee benefits attract and retain
talent and enhance the organizational commitment of the employees

5.

The employers as well as the employees can derive some special benefits
such as tax benefits.

History and Evolution of Benefit Programs

Some Modern Concepts in Employee Benefit Schemes:
i.

Golden parachute
The golden parachute is a provision in the employment contracts of the
top management, which ensures the provision of compensation or
lucrative benefits for the loss of a job following a change of control
(i.e., acquisition by another firm). Under this provision, a lump-sum
payment or payment over a specified period at full or partial rates of
normal compensation is made. Golden parachutes help in minimizing
conflict of interest between shareholders and managers in the event of a
change of control. A golden parachute should not be confused with
severance payments.
The golden parachute can take different forms:

Continuation of the salary

Bonus and/or certain benefits and perquisites

Retirement benefits

Accelerated vesting of stock incentives

CONTD.

ii.

Cafeteria benefit plan

Many organizations have been adopting the flexible benefit plan or the
cafeteria benefit plan to give employees a choice in selecting the most
suitable benefit schemes. In this method, the management customized
the benefits programs after assessing employee preferences and needs.