Compensation Management

Before reading the compensation management topic,  one should know the impact of compensation system on the organisation and its gravity if it is not managed effectively. First and last word on compensation management is that, it is core and direct influencing factor on employee motivation and other factors succeeds. 

Employees, in exchange of their work, generally expect some appreciation. Money is considered as the most important motivating factor for employees, though non-financial incentives work efficiently. The goals of compensation management are to design the lowest-cost pay structure that will attract, motivate and retain competent employees. Here the term compensation and salary of employee are one and same.

Before knowing about Compensation management one must know the labor laws of the country which are governing employees compensation or remuneration system. International Labour Organisation (ILO) made conventions on labour welfare especially on regularly in payment of wages & salaries with minimum pay for stipulated working hours. In accordance with the conventions & recommendations of ILO every country has established labour laws and enforced, who ever contravene them shall be liable for penalty or punishment under serious cases both may be awarded. Naturally judiciary of the concern country is watchdog for dealing labour issues.

India is one of the countries with very high population and stands second in place followed by china. In the India, parliament has enforced four key laws on wages of workers that are Payment of wages act 1936 and Minimum wages act 1948 for the purpose of ensuring minimum payment for particular type of jobs in different sectors and industries according to stipulated working hours prescribed by the law.  Normally eight hours is  stipulated working time in almost all countries,  above stipulated time if any worker is made to work, his employers has to compulsory pay overtime,  if not it shall be treated as unlawful by the court of law for which it may impose penalty. Other side of coin it may create serious dissatisfaction among workers and make them feel that they are  being exploited which may lead to  agitations eventually may lead strikes which is ultimate weapon in hands of workers,  ultimately organisations may chose for lockout which is the weapon in  hands of employers altogether may create industrial disputes. On this law may support worker agitation for not complying payment of wages by their employer in accordance with wage laws and in some cases law may support employer if workers agitation causes serious damages to organisation. 

The third key law is workmen's compensation act 1923, the primary objective of this law is to have any compensation by an employee from his employer if any accident occurs, which make permanent are partial disablement. This law defines under schedules various types of accidents certain to happen to worker and percentage of compensation paid to him in accordance with his age. 

The fourth key law is Equal Remuneration Act, 1976, according to the section 4 it is the  DUTY OF EMPLOYER TO PAY EQUAL REMUNERATION TO MEN AND WOMEN WORKERS FOR SAME WORK OR WORK OF A SIMILAR NATURE. According to Section 3, a settlement arrived at between the management and the employees cannot be a valid ground for effecting discrimination in payment of remuneration between male and female employees performing the same work or work of a similar nature; Mackinnon Mackenzie and Co. v. Audrey D’ Costa, (1987) 2 SCC 469.

"The most important thing is to note that compensation plays a major role in attracting talent from the market and compensation system of the organisation is Key factor for creating employer brand, which is most important factor for attracting talent people. Having talent people for the organisation is a major asset for the organisation development"

Importance of employees compensation or reward system 
  • Compensation or reward system of the organisation is most influencing factor for employee motivation, must remember.
  • If we observe history of causes of industrial disputes, employee compensation a reward system issues were the main reason in most cases.
  • good compensation system of rewards system in the organisation will minimise industrial disputes and helps in maintaining peace and harmony within the organisation.
  • Compensation system plays a key role in employee attrition.
  • Compensation system mostly influences retention of employee in the organisation.
  • Most of employee satisfaction depends upon compensation a reward system of organisation.
  • Effective compensation system builds employer brand, which plays a key role in attracting talent.
  • Effective compensation system makes employee to put his full efforts for achievement of organisation's goals and objectives.
  • Effective compensation system builds initiative towards work, which in turn enhances the productivity of organisation.
  • Effective compensation makes employees feel belongingness towards the organisation.

The HR Compensation Analyst assists with producing the organization's compensation program. Their primary responsibility is the research and study to determine appropriate employee compensation. In addition, they evaluate predicted market trends, recommend revisions to company compensation plans, review job descriptions, and assist the Compensation Manager.

The HR Compensation Manager
directs the organization's compensation program. Their responsibilities include developing job descriptions, analyzing jobs, conducting salary surveys and job evaluations, and establishing a salary structure. They suggest revisions to the compensation plan and procedures, administer bonus and incentive programs, and manage the performance appraisal system.

Facts [+]
A recent WorldatWork survey of more than 6,000 managers and employees in 26 organizations in North America found that many employees and managers do not understand why they get paid what they do. 40%  reported as knowing what to do to increase their base pay. Only 38% percent reported knowing how to increase the size of their cash bonus.

The 2011 Nielsen survey also showed that the top five dimensions students considered when it comes to seeking employment were high degree of independence at work, salary package, learning on the job, growth prospects and standing of the company in the market respectively.
Mercer Human Resource Consulting, a subsidiary of Marsh and McLennan, is a global leader in HR and financial services. Mercer Human Resource Consulting provides expertise in human resource areas, ranging from compensation and benefits to operational effectiveness and employee performance and engagement. Mercer has over 15,000 employees serving clients in 41 countries.

The Adamson Act was signed by President Woodrow Wilson in 1916. The law established for railroad workers an eight-hour workday with additional pay for overtime work. This was the first federal law that regulated the hours of workers in private companies in the U.S. The 1938 Fair Labor Standards Act made the eight-hour work day a "legal work day" work throughout the nation.

The Fair Labor Standards Act was passed in June 1938. The main objective of the law was to establish minimum standards of living necessary for health, efficiency, and well being of workers. A major provision of the act was the establishment of a minimum wage, initially 25 cents an hour, along with a maximum workweek of 44 hours.

Employee pay raises have averaged a little less than four percent for the past several years according to data compiled by WorldatWork. The two main reasons cited for the relatively low pay raises are: lower rates of inflation and cost-of-living increments, and the increasing use of bonus and variable pay to reward high performing employees.

In India, The Payment  Wages Act was enacted in the year 1936 for the purpose of payment of wages regularly to the workers within time limit not exceeding wage period of one month with out  any deduction by his employer. Deduction form salary or wages can be done in case of absence, loss or damage, fines and advances.etc. Deductions shouldn't exceed 50% from wage.

Compensation: an overview

Compensation management is one of the most challenging human resource areas because it contains many elements and has a far-reaching effect on the organisation's goals. The purpose of providing compensation is to attract, retain and motivate employees. There are two main types of financial compensation.
  1. Direct financial compensation - the pay that a worker receives as wages, salaries, commissions and bonuses, and
  2. Indirect financial compensation - all financial rewards that are not included in direct compensation (i.e. benefits).
An example of direct financial compensation is the money the worker receives as wages at the end of the week, or as a salary paid at the end of the month. Many companies pay salaries straight into the employee's bank account.

An example of indirect financial compensation is when the company contributes to an employee's housing subsidy or a pension plan.

Not all compensation is financial. A worker can get great satisfaction from his work and enjoy the environment in which he works. This is called non-financial compensation and cannot be counted in terms of money. For example, a veterinarian might enjoy working outside, going to farms to treat animals and deliver calves. A publisher might enjoy the challenge of producing books that will enrich people's lives.

It is not always possible to provide a perfect pay package (the agreement between the organisation and the employee about how much money and other benefits the employee will receive). Because of this, some companies allow their employees to work out their own compensation packages.

India: Central government employees draw more salary along with benefits than state government employees, compared with private sector employees. There is a particular pay structure fixed for every government employee in India which is not in private companies. The pay structure of government employees in India is as follows

Employee salaryBasic pay + Grade pay + Dearness Allowance (DA) + House Rent Allowance (HRA) + City Compensatory Allowance (CCA)

The details of above said components of salary of government employees are as follows.
  • Basic pay: The primary component of employee salary which is bases for calculation of other components in the employee salary.
  • Grade pay: An amount which is fixed by the government on the range of employee in government hierarchy. (for example; Group A officers have high grade pay than Group B officers.)
  • Dearness Allowance: Certain percentage of the amount on basic pay. This percentage varies from state government to Central government employees. An allowance paid to employees on the basis of consumer Price index. Consumer price index denotes the cost of the products which influences by the inflation. (in simple terms cost of living) At present, 41%  is for state government employees and 72 % is for Central government employees as dearness allowance on their basic pay.
  • House Rent Allowance (HRA): Certain percentage of the amount on basic pay. This percentage varies from state government to Central government employees. This allowance is paid to employees are meeting house rent expenditure.
  • City Compensatory Allowance (CCA): An allowance paid according to the city or town where employee do the job and the purpose of this allowance is to compensate high cost of living especially in cities like Mumbai, Delhi, Calcutta and Hyderabad et cetera . Government decides the amount of allowance to be paid to employees on basis of city or town.

Facts [+]
An estimated twenty-five million American employees without bank accounts are unable to be paid via direct deposit. Increasing numbers of organizations are offering employees without bank accounts payroll cards, similar to debit cards. Electronically transferring funds to employees is estimated to be up to 75% cheaper than issuing traditional paychecks.

"Red-circling" refers to freezing a highly tenured or highly skilled employee's base pay in the event that the pay rate is above the established range maximum assigned to the job grade or classification. A red-circled employee is usually not eligible for further base pay increases until the top pay rate for their job grade/classification is increased.

Objective of Compensation

The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike. The desired outcome is an employee who is attracted to the work and motivated to do a good job for the employer. Patton suggests that in compensation policy there are seven criteria for effective­ness. Compensation should be:

  1. Adequate Minimal governmental, union, and managerial levels should be met.
  2. Equitable Each person should be paid fairly, in line with his or her effort, abilities, and training.
  3. Balanced Pay, benefits, and other rewards should provide a reasonable total reward package.
  4. Cost-effective Pay should not be excessive, considering what the organization can afford to pay.
  5. Secure Pay should be enough to help an employee feel secure and aid him or her in satisfying basic needs.
  6. Incentive-providing Pay should motivate effective and productive work.
  7. Acceptable to the employee The employee should understand the pay system and feel it is a reasonable system for the enterprise and himself or herself.

Facts [+]

Mercer Human Resource Consulting, a subsidiary of Marsh and McLennan, is a global leader in HR and financial services. Mercer Human Resource Consulting provides expertise in human resource areas, ranging from compensation and benefits to operational effectiveness and employee performance and engagement. Mercer has over 15,000 employees serving clients in 41 countries.

Ma Foi Consulting Solutions  HR BPO India has 350 clients and over 250 associates. Globally, ADP claims to manage human resource, payroll, tax and benefits administration solutions to over 5.7 lakh clients.