Compensation Components & Theories

1. Compensation Components & Theories

2. Components of Compensation 2

3. Wage and salary • Wage • It represents hourly rates of pay • Salary Salary refers to monthly rte of pay, irrespective of the number of hours put in by an employee.

4. Incentives • Also called pay by results. • Depends upon productivity, sales, profit, cost reduction etc. Individual schemes Vs Group Schemes

5. Allowances • Allowances such as HRA, Conveyance allowance and LTA

6. Claims • Bills claimed • Mobile • Internet • Medical • Subject to limit and against valid submission of bills

7. Gratuity • Paid at the time of employee exist after serving more than 5 years • Governed by the payment of gratuity act, 1922.

8. Taxes • Like death, are unavoidable

9. Fringe benefits • Benefits like provident fund, gratuity, medical cares, hospitalization, insurance, canteen, uniform etc.

10. Perks/ Perequisities • Company car, club membership, paid holidays, furnished house, stock option scheme

11. Extent of Pay In practice, the norms seem to have been thrown to winds and exorbitant amounts are paid to decision makers in organisations Fattest Pay Packages (Fiscal 2012) Fattest Pay Packages Compensation of Satyam’s Independent Directors (Fiscal 2012) 11

13. Equity Theory (Adams, 1963; Landy, 1989; Beehr, 1996)

14. Equity Theory A version of discrepancy theory of job satisfaction focusing on the discrepancies between what one has on the job and what one thinks is fair - what one should have

15. Equity Theory • Inputs - factors considered by the individual that contribute to their work - knowledge, skills and abilities • Outcomes - factors considered by the individual to have personal value - money, promotion, praise

16. Equity Theory • I/O < I/O (Underpay) • 5/10 10/10 • Inequity • I/O = I/O (Equity) • 10/10 = 10/10 • I/O > I/O (Overpay • 5/10 10/10 • Inequity Equity

17. Equity Theory • Social comparison takes place • Perceived discrepancies between ratios may produce tension or dissonance • Amount of discrepancy corresponds to the amount of tension the individual experiences • Amount of tension corresponds to the amount of energy an individual expends to alleviate the discrepancy

18. Expectancy Theory • The theory assumes that behavior results from conscious choices among alternatives whose purpose is to maximize pleasure and minimize pain. • Key elements: • Valence (V) • Instrumentality (I) • Expectancy (E)

19. Expectancy theory

20. Valence • The emotional orientation people hold with respect to outcomes (rewards). • Value varies from -1 to +1. • -1  individual prefers not accomplish an outcome compared with achieving it. • 0  individual is unconcerned to the outcome. • +1  individual has the strong preference to the outcome. • Valence must be +1  for higher motivation.

21. Valence • -1  employees feels that the rewards that they received are not worthy with their efforts to show up for work during a snowstorm. • +1  employees are motivated go to work during a snowstorm as they has the high inclination to the outcome.

22. Instrumentality • The belief that the first level outcome will lead to the second level outcome. • Value varies from 0 to 1. • High instrumentality rate  employee sees that promotions are based on performance. • Low instrumentality will be made if the employee failstoseethe relation between performance and reward.

23. Instrumentality • Employees believed that excellent performance will be given a good rewards  they will be motivated to come to work in any conditions • If employees didn’t see the correlation between performance and reward they don’t care and not make any effort to leave their home.

24. Expectancy • The belief that an effort will lead to completion of a task. • Value varies from 0 to 1. • 0  employee sees no possibility that any effort will lead to the desired performance. • 1  employee is confident that the task will be completed.

25. Managerial Implications of Expectancy theory • According to Expectancy theory:

26. Factors Influencing Employee Compensation 26

27. External • 1. Labour market Demand and supply (Labour vs CEO) Example: • Manufacturing sector (Technical vs non-technical) • LPU (Technical vs non-technical)

28. 2. Cost of Living • Determined factor while deciding salary • Organization keeps DA flexible • Example: • Jalandhar Vs Banglore

30. 3. Labour unions • Strength of the union one of the important factor in influencing compensation • Unions also exert pressure on management and also keep a watch on law and regulation given by government for compensation • Example: • IT industry don’t have any union • Bank union

32. 4. Legislations • Labour law and regulations • Example: • Minimum wage act, 1948 • Payment of bonus act, 1965 • Payment of Gratuity act, 1972 etc.

33. 5. Economy • State of the economy • Developed Vs depressed economy • USA Vs India

35. Internal Factors 1. Business Strategy When want to achieve rapid growth = higher compensation as compared to competitors

36. Compensation Plans and Business Strategy () Source: Wayne F. Cascio, Managing Human Resources, McGraw-Hill, p. 352. Linkage of Remuneration Strategy to Business Strategy 36

37. 2. Job evaluation (A job evaluation is a systematic way of determining the value/worth of a job) and Performance Appraisal

38. 3. The employee • Employee related factors • Education • Performance • Experience • Potential • Luck

40. Concepts of Wages • Minimum Wage: providing for sustenance of life plus for preservation of the efficiency of worker • Fair Wage: Equal to the rate prevailing in the same trade and in the neighbourhood, or equal to the predominant rate for similar work throughout the country • Living Wage: Is higher than fair wage. Provides for bare essentials plus frugal comforts 40

42. Incentives and Performance-based Pay

43. Nature of Incentive Payments Incentives are variable rewards granted to employees according to variations in their performance Importance Inducement and Motivation of workers Reduced supervision, better utilisation of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover, and increased output 43

44. Nature of Incentive Payments (Contd.) Disadvantages There is a tendency for the quality of products to deteriorate unless steps are taken to ensure maintenance of quality through checking and inspection Jealousies may arise among workers because some are able to earn more than others Difficulty also arises in determining the standard performance 44

45. Prerequisites for an Effective Incentive System The co-operation of workers in the implementation of an incentive scheme is essential The scheme must be based on scientific work measurement Indirect workers should also be covered by incentive schemes There should be management commitment to the cost and time necessary to administer incentive schemes properly There is greater need for planning 45

46. Types of incentive programmes • Individual • Differential piece rate • Piece rate • Time based • ranking • Group • Cost efficiency bonus plan • Priestman bonus plan • Organization wide incentive plan • Profit sharing • ESOP (employee stock ownership plan)

47. Types of incentives schemes • Straight Piece rate In direct proposition of their performance. Wage earning = no. of units produced X the piece rate per unit

48. 2. Differential piece rate First fail to motivate and recognize highly efficient employees. sets standards and several piece rate (like rubrics) Example: Std output 60 units Employee 1: 150 then getting Rs.2.5/piece Employee 2:49 then getting Rs. 2/piece

49. 3. Task and time Bonuses Modified differential based upon time Example: std time 5 hour, regular payment 10rs/hour, bonus Rs. 10/hour Employee 1: completes in 4 hours So, 4x10+10=50Rs. Employee 2: Completes in 5 hours So, 5x10=50

50. 4. Merit rating • Which can not be measured in terms of production units Setting standard and comparing with actual performance Examplefor setting std are punctuality, competency, initiative, reliability, safety measures, punctuality, regularity, behavior etc.