HUMAN RESOURCE MANAGEMENT UNIT - 4 LESSON 2: COMPENSATION

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

HUMAN RESOURCE MANAGEMENT

N.O.T.E.S 

UNIT - 4 

LESSON 2: COMPENSATION

CONCEPTS AND POLICIES

1. Role of Human Resources:

   - Human Resources department aims to create a productive environment and support employees in achieving their full potential.

   - They administer corporate policies, comply with laws, and provide personal and professional growth programs.

2. Importance of Employee Relations:

   - Positive working relationships with all employee groups contribute to a favorable work environment.

   - The Manager, Salary Presidency, is responsible for maintaining these relationships.

3. Compensation and Benefits:

   - Compensation refers to monetary rewards given to employees for their work.

   - Benefits include non-monetary perks like group medical insurance or allowances.

   - Compensation and benefits are essential for attracting and retaining talented employees.

4. Compensation Management:

   - It involves overseeing different types of compensation provided by the organization.

   - Types include base pay, employee benefits, incentives, and assistance programs.

   - Communication about pay is crucial for organizations to ensure transparency and employee satisfaction.

5. Impact of Compensation:

   - Compensation affects employee productivity, organizational performance, and job satisfaction.

   - A fair and effective compensation system improves professionalism, trust, and collaboration.

   - It also reduces turnover and contributes to the organization's overall success.

6. Compensation Policy:

   - The compensation policy outlines the components and usage of compensation in the organization.

   - It determines how compensation is calculated, who is eligible, and the approval process.

   - The policy is essential for ensuring employees are fully compensated and motivated to perform their best.

7. Compensation Guideline and Document:

   - The compensation guideline provides detailed information about individual compensation components and their impact on behavior and involvement.

   - The compensation document outlines the organization's overall compensation practices and helps in understanding compensation mechanisms.

 

Compensation Policy and its Connection to Other HR Elements:

1. Compensation Policy and Strategy:

   - The compensation policy is linked to the organization's compensation strategy, which outlines the overall approach to compensation.

   - The policy should align with the strategic goals of the organization.

2. Recruitment Policy:

   - The compensation policy should be integrated with the recruitment policy to attract and retain qualified candidates.

   - It helps determine competitive salary ranges and benefits packages to attract top talent.

3. Performance Management:

   - The compensation policy is connected to performance management systems.

   - It establishes the link between performance and rewards, such as bonuses or salary increases.

4. Talent Management:

   - The compensation policy plays a role in talent management by ensuring equitable compensation for high-performing employees.

   - It may include provisions for recognizing and rewarding top talent to retain them within the organization.

5. Employee Segmentation:

   - The compensation policy may differentiate compensation based on employee segments or levels within the organization.

   - Different segments may have different compensation structures based on job roles, skills, or experience.

6. HR Operations:

   - The compensation policy guides HR operations related to payroll, benefits administration, and compensation reviews.

   - It provides guidelines for managing compensation-related processes efficiently.

7. Corporate Culture:

   - The compensation policy should align with the organization's corporate culture and values.

   - It should promote fairness, transparency, and consistency in compensation practices.

8. Business Partnering:

   - The compensation policy supports HR's role as a strategic business partner.

   - It ensures that compensation practices align with organizational goals and support business objectives.

Key Principles of Modern Compensation Policy:

- Engaging Processes: The policy should involve employees in the compensation decision-making process.

- Self-Explanatory: The policy should be clear and easily understood by both managers and employees.

- Freedom to Act: It should provide flexibility for managers to make compensation decisions within established guidelines.

- Simple Language: The policy should use straightforward language to avoid confusion or misinterpretation.

- Clear Guidelines: It should provide clear guidelines for determining compensation components and their implementation.

- Appealing Procedure: The policy should outline a fair and appealing procedure for addressing compensation-related issues.

              BASE AND SUPPLEMENTARY                                     COMPENSATION 

Remuneration and its Components:

1. Definition:

   - Remuneration refers to both monetary and non-monetary rewards provided to employees in exchange for their services.

2. Monetary Benefits:

   - Base compensation includes salaries and wages paid to employees.

   - Salaries are fixed payments for the time spent on the job.

   - Wages are compensation for office workers and can be based on units produced or time worked.

Examples: A company pays its employees a monthly salary based on the hours worked. 

3. Non-Monetary Benefits:

   - Remuneration also includes non-monetary benefits such as vacations, maternity leave, and medical coverage.

   - These benefits contribute to employee satisfaction and well-being.

Examples: An organization offers paid vacations and comprehensive health insurance coverage.

4. Employee Motivation:

   - Compensation plays a vital role in motivating employees to perform their best.

   - It serves as a reward for their efforts and contributes to job satisfaction.

Examples: A performance-based bonus scheme encourages employees to achieve targets.

5. Labor Turnover:

   - Well-structured compensation packages help reduce employee turnover.

- When employees feel adequately compensated, they are more likely to stay with the organization.

Examples: An organization with competitive compensation packages experiences lower turnover rates.

INDIVIDUAL, GROUP, AND ORGANIZATIONAL INCENTIVE

Types of Reward Systems:

1. Individual Incentive Plan:

   - Emphasizes individual performance and rewards employees based on their individual achievements.

   - A certain pay rate is guaranteed, and incentives provide additional compensation.

   - Different categories of employees, such as blue-collar workers, sales representatives, and management staff, may have distinct incentive plans tailored to their needs.

Examples: Sales representatives receive a base salary and additional commission for meeting or exceeding sales targets.

2. Group Incentive Plan:

   - Focuses on the collective achievement of a group or team.

   - Rewards are tied to the overall success of the team, department, or organization.

   - Encourages collaboration and teamwork.

Examples: A manufacturing team receives a bonus when they achieve production goals collectively.

3. Blended Rewards:

   - Combines individual and group incentives in a reward system.

   - Recognizes both individual contributions and the collective performance of teams or departments.

   - Ensures fair compensation for employees' efforts.

Examples: An organization offers individual performance bonuses while also providing team-based incentives for departmental achievements.

FRINGE BENEFITS 

- Fringe benefits are additional benefits provided to employees alongside their regular pay for completing a specific category of service.

- Some fringe benefits are legally mandated, such as social security and health coverage, while others are voluntarily offered by employers.

- Examples of fringe benefits include medical insurance, workers' compensation, pension plans, and medical and family leave.

- Additional fringe benefits may include paid holidays, meal incentives, public transport benefits, and more.

Types of Fringe Benefits:

1. Stock Options: Employees receive the opportunity to purchase company stock at a set price, allowing them to benefit from the company's growth in value.

2. Free or Discounted Meals: Employers may offer complimentary or discounted meals as a perk, including designed meals, coffee, or food discounts.

3. Free or Discounted Gym Memberships: Some employers provide free or discounted gym subscriptions, especially if they work in the athletic industry or have an in-house fitness center.

4. Transportation Assistance: Employers may provide transportation aid, such as reimbursement for commuting expenses or access to a company vehicle for work-related travel.

5. Tuition Reduction or Assistance: Some employers offer tuition reductions or financial assistance to help employees pay for educational courses that enhance their skills.

6. Insurance Coverage: Employers may provide life, dental, and vision insurance coverage to employees, with specific plans tailored to their needs.

7. Daycare Reimbursement: Some employers reimburse employees for childcare expenses or provide on-site childcare facilities.

8. Paid Time Off (PTO): Employers may offer a set number of paid time off days or unlimited PTO days based on performance objectives.

9. Subsidized Amusement Park Tickets: Employers may offer discounted tickets to amusement parks as a way to support work-life balance.

10. Retirement Contributions: Employers may contribute to employees' retirement plans, such as 401(k), to help them save for retirement.

11. Paid Sick Days: Employers typically provide a certain number of paid sick days each year in addition to other paid time off.

PERFORMANCE LINKED COMPENSATION

Performance-Based Compensation (PBC):

- Performance-based compensation is a framework that offers additional financial rewards to employees based on their performance, in addition to their standard wages.

- It can be implemented at the individual, divisional, or organizational level, where compensation is tied to achieving predetermined goals and benchmarks.

- Performance-based compensation systems are also known as Pay-for-Performance systems.

- Employers using these systems must establish clear performance measures, monitor progress, and provide compensation such as rewards when targets are met.

Advantages of Performance-Based Compensation:

1. Retention of Best Employees: Performance-based compensation helps employers identify high-performing employees and reward them accordingly, which increases the likelihood of retaining top talent.

2. Motivation for Employees: A performance-linked pay plan serves as motivation for employees to consistently perform at their best, as they are rewarded fairly for their contributions. This fosters a culture of productivity and may attract more talented individuals to the organization.

3. Improved recruitment: By identifying and rewarding high-performing employees, organizations can use this information to improve their recruitment processes. They can seek candidates with similar traits, goals, and personalities, leading to better hiring decisions.

4. Reduced Turnover Costs: When employees are compensated based on their performance and efforts, they are less likely to leave the company, resulting in reduced turnover costs for employers.

EMPLOYEE STOCK OPTION

Employee Stock Options (ESOs):

- Employee Stock Option Plans (ESOPs) or Employee Stock Ownership Plans (ESOPs) are employee benefits strategies that allow employees to own stock in the company.

- Employees purchase these shares at a price below the market price or at a discount.

- Employee stock options (ESOs) are equity compensation given to employees and executives by companies, granting them the right to purchase company stock at a predetermined price for a limited time.

- ESOs are similar to regular call options, but they are issued by the company and cannot be sold.

- The benefits of ESOs are realized when the stock price rises above the exercise price, allowing the option holder to acquire the stock at a discount

- Option holders can choose to sell the stock immediately for a profit or hold onto it for the long term.

PAY BAND COMPENSATION SYSTEM

Pay Bands:

- A pay band is a salary range used to rank different jobs based on education and experience, ensuring fair compensation and appropriate placement of employees.

- Employers are legally required to disclose the minimum and maximum amounts they are willing to pay for each pay band.

- Pay bands help to standardize the compensation structure and establish basic pay ranges aligned with market rates.

- They provide flexibility for salary adjustments based on business needs and market rates for similar roles.

- Pay bands offer employees a range of potential salaries within their position, allowing for increased earnings with experience and skill development.

- They support employee development and progression by enabling movement to different pay bands as skills and experience grow.

- Pay bands contribute to organizational efficiency and effectiveness by ensuring fair and appropriate compensation based on skills and experience.

Challenges of Pay Bands:

- Employees need to understand the rationale behind pay bands.

- Choosing the appropriate size and structure for pay bands can be challenging.

- Ensuring equity and internal consistency in pay scales.

- Designing compensation programs that align with pay band constraints.

- Establishing an effective process for managing exceptions to pay band limits.

JOB EVALUATION

- Job evaluation is a systematic approach to determining the comparative value of different jobs within an organization to establish a fair and coherent compensation structure.

- It involves assessing the significance of various jobs and creating a job hierarchy based on their value to the company.

- Job analysis is an essential part of the evaluation process, providing information about job descriptions and the nature of work.

- The evaluation aims to establish a logical and orderly job structure based on the complexity of services performed and their contribution to the business.

- Job evaluation helps ensure equitable compensation and fosters performance and efficiency.

Steps in Job Evaluation:

1. Job analysis: Gathering information about job descriptions, tasks, responsibilities, skills required, and working conditions.

2. Job description: Capturing job content information, including responsibilities, essential work instances, and required competencies.

3. Job evaluation based on the organization's strategy: Assessing job duties using job evaluation methods like job classification, job evaluation, or point factor schemes.

4. Establishing the job hierarchy: Ranking job positions based on their relative importance to the organization.

Importance of Compensation Planning:

- The goal of compensation planning is to develop an internally equitable and externally competitive program.

- Market pay is considered to effectively compete for employees.

IN-TEXT QUESTIONS

1. ________ can take the form of compensation.

a. Monetary                   b. Non-monetary

c. Both 'a' and 'b'           d. None of the above

2. Wages represent ____________ pay rates.

a. Hourly                        b. Daily

c. Weekly                       d. Monthly

3. Which of the following is also known as ‘payments by outcome.’

a. Allowances                b. Claims

c. Incentives                  d. Fringe benefits

4. The incentive is ascertained by ______________ .

a. Productivity              b. Sales

c. Profit                        d. All of the above

5. ____________ is paid when an employee leaves after more than five years of service.

a. Perquisites              b. Claims

c. Gratuity                 d. Allowances

ANSWERS: 

1. c. Both 'a' and 'b' (Compensation can take the form of both monetary and non-monetary benefits.)

2. a. Hourly (Wages typically represent pay rates based on an hourly basis.)

3. c. Incentives (Incentives are also known as 'payments by outcome' as they are provided as rewards for achieving certain performance goals or outcomes.)

4. d. All of the above (Incentives can be determined based on productivity, sales performance, and profitability, among other factors.)

5. c. Gratuity (Gratuity is typically paid to an employee who leaves after more than five years of service as a form of retirement benefit or severance payment.)

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