1. Unit II COMPENSATION Planning. PRESENTED BY MR.SHYAM FARDALE

2. INTRODUCTION The term compensation as a substitute word for wages and salaries, is of recent origin. Wages is now considered as a cost factor. Therefore, strategic management of wages and salaries is very important for organisations. It has become imperative for organisations to balance the cost of compensation and employee motivation (for retention) to survive in a competitive world. Employee compensation is a better term than employee benefits or wages or salaries. What the employee provides the employer is a labor service, usually known as work. This labor service consists of many different kinds of employee behavior, such as showing up regularly and on time, carrying out tasks dependently, cooperative with others and making useful suggestions.

3. Cont.... The word compensation may be defined as “All forms of financial returns, tangible services and benefits that an employee receives in his/her term of employment.” The modern definition of compensation, however, considers both intrinsic and extrinsic components of compensation. While extrinsic compensation covers both monetary and non-monetary rewards, intrinsic compensation covers both monetary and nonmonetary rewards, also reflects the employees’ mental satisfaction with their job accomplishments.

4. Objectives of Compensation The objectives of compensation or wages can be classified under four broad categories – Equity, Efficiency, Macroeconomic stability. Optimum allocation of labor.

5. Cont... Equity : The first category is equity, which may take several forms. It includes income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages and the concept of equal pay for work of equal value. Compensation management strives for internal and external equity. Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar pay. External equity requires that pay be related to the competitive pay.

6. Cont..... Efficiency : It is often closely related to equity, The objectives of efficiency are reflected in attempts to link a part of wages to productivity or profit, group or individual performance acquisition and application of skills and so on. Macro-economic stability – It can be achieved through high employment levels and low inflation. For instance, an inordinately high minimum wage would have an adverse impact on levels of employment. Efficient allocation of labor : The efficient allocation of labor in the labor market implies that employees will move to wherever they receive a net gain.

7. Other Objectives of Compensation : Acquire Qualified Personnel : Compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labor market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others. Retain Current Employees : Employees may quit when compensation levels are not competitive, resulting in high turnover. Reward Desired Behavior : Pay should reinforce desired.

8. Cont... Facilitate Understanding : The compensation system should be easily understood by human resource specialists, operating managers and employees. Further Administrative Efficiency : Wage and salary programmes should be so designed that they can be managed efficiently. Principles of Compensation Formulation : The main factors affecting wage or compensation levels within an organisation are – external relativities, salary and individual worth. Understand External relativities – Market rate as affected by supply, demand and general movements in pay levels.

9. 12–9 Nature of Compensation Planning Intrinsic Intangible, psychological and social effects of compensation Extrinsic Tangible, monetary and nonmonetary effects of compensation

10. Components/Type of A Compensation Program

11. Direct Compensation

12. Indirect Compensation

13. Factors Influences on Compensation Planning 1) External Influences on Compensation 2) Internal Influences on Compensation

14. Labor Market Economy Government Unions External Influences on Compensation

15. Internal Influences on Compensation Organization Size Organization Age Labor Budget Who Makes Compensation Decisions

16. DEFINITION:- WAGE : - “ Indian labour organization defined term wage as “the remuneration paid by the employer for the services of hourly,daily,weekly and fortnightly employees”. SALARY: - “It is defined as the remuneration paid to the clerical and managerial personnel employed monthly or annual basis.”

17. OBJECTIVES TO protect in public as progressive employers and to comply with the wage legislatives. TO facilitate pay roll(- a list of employees and their payment) administration of budgeting and wages. TO simplify collective bargaining procedure and negotiation. TO promote organisation feasibility. TO keep labour and administrative cost in line with ability of organisation to pay.

18. METHODS OF WAGE PAYMENT wages Time wage Based on unit of time Piece wage Based on productivity

19. Time wage system It is based on the amount of time spent at work. e.g: per hour, per day etc. Features of time wage: It is more widely used as it is very simple to compute the earnings. It provides guaranteed and secure income, there by removing the fear of irregularity of income. It facilitates payroll function.

20. DRAWBACKS Time wage system offers no incentives for employees. Merits is discounted and inefficiency is at a premium as all receive the same salary. Ambitious workers receive no monetary reward for their talents. It demands intensive and strict supervision.

21. PIECE WAGE SYSTEM It is based on the amount of work performed or productivity. The earnings of the employee are directly proportional to his output or performance.

22. Features of piece wage It is simple and easy to understand. The worker is interested in giving higher efficiency. Cost accounting by management is made easy.

23. Drawback of piece wages Danger of overwork. This leads to risk of accident and excessive fatigue. It requires a lot of supervision to maintain the quality and standard of work. It is an inefficient method, if quality is to be given top preference.

24. Wage incentive plans A system of wage payment which would focus on quality and quantity is called wage incentive plan. Characteristics of a sound wage incentive plan:- All the interested parties i.e. management, workers and trade unions must accept and co-operate in the incentive plan. Employees must be taught how to perform the work according to the optimum or standard methods and procedure. The employees should be assured of a certain minimum wage irrespective of output. An incentive plan should facilitate ready and easy calculation of the employees earning. this will build up trust and confidence

25. WAGE FIXATION The generally accepted principles governing the fixation of wages are:- Job requirements:- wages should be based on the variations in job requirements such as skill, responsibility, labour market conditions and mental and physical requirements. Criterion:- the level of wages paid should be in line with the prevailing rate in the labour market. Equal pay for equal work:-if two jobs have the same requirements and similar responsibilities, the pay should be the same. Reasonable standard of living:-workers should receive a guaranteed minimum wage to assure them of a reasonable standard of living. Flexible wage structure:-the wage structure should be flexible so that changing conditions can be easily met. Distinguish between jobs and employees: - a job should carry a certain wage rate and person should be assigned to fill it at that rate.

26. WAGE DIFFERENTIALS It is an important economic functions like labour productivity,attracting the people to different jobs. IMPORTANCE: Attracting efficient workers. Maximization of employee commitment. Development of skills and knowledge. Utilization of human resources. Maximization of productivity through wage differentials by directly allocating manpower among different units, occupations and regions in order to maximize overall production. Provide an incentive for better allocation of human force – labour mobility among different regions. Plays a pivotal role in a planned economy in the regulation of of wages and development of national wage policy by allocating the skilled human force on priority basis

27. Reasons for wage differentials Wage differentialsReasons Interpersonal differentialsdifferentials in sex, skills, age, knowledge, experience. Inter-occupational differentialsvarying requirements of skill, knowledge, demand situation. Inter-area differentialscost of living, ability of employers to pay, demand and supply situation. Inter firm differentialsability of employer to pay, employees bargaining power, degree of unionization, skill needs etc.

28. Incentives Paid in addition to wages and salaries Depend upon productivity Sales Profit Cost reduction efforts Individual incentive schemes------specific employee performance. Group incentive programmes

29. Wage incentive plans A system of wage payment which would focus on quality and quantity is called wage incentive plan. Characteristics of a sound wage incentive plan:- All the interested parties i.e. management, workers and trade unions must accept and co-operate in the incentive plan. Employees must be taught how to perform the work according to the optimum or standard methods and procedure. The employees should be assured of a certain minimum wage irrespective of output. An incentive plan should facilitate ready and easy calculation of the employees earning. this will build up trust and confidence

30. Types of incentive plans Halsey plan Rowan plan Taylor’s differential piece wage plan

31. Halsey plan It is a plan originated by F.A Halsey to encourage efficiency amongst workers as well as to guarantee them wages according to time basis The standard time required for a job is determined before hand on the basis of time and motion studies. workers who perform the job in less than the standard time and thus save time are rewarded with a bonus but the worker who takes longer than the standard time is not punished, and is paid wages according time wage system.

32. Rowan plan wages, according to time basis, are guaranteed and the slow worker is not made to suffer. A standard time is determined before and a bonus is paid according to time saved. under this plan bonus is based on that proportion of the time saved which the time taken bears to the standard time. it can be expressed as follows : Bonus = time saved × time taken × 100 Standard time×hourly rate

33. Taylor’s differential piece wage plan Under this plan, there is no guarantee of wages. the standard of output is fixed per hr or per day and two piece wage rates are laid. Those exceeding the standard or even just attaining it, are entitled to the higher rate and Those,whose output is less than the standard output are paid at a lower rate.

35. Factors influencing incentive plans The organization ability to pay Supply and demand for labour Prevailing market rate Cost of living Productivity Job requirements Managerial attitudes Trade unions bargaining power

36. Legal framework on wages The Government has enacted various laws to regulate and govern the wages they are: The payment of Wages Act 1936:- The objective of the act was to ensure regular and prompt payment of wages and to prevent the exploitation of wage earners by arbitrary deductions and fines. The Minimum Wages Act 1948:- The aim of this act is to fix minimum wages in certain employees. This act seeks to avoid exploitation of workers by under-paying them for their efforts The payment of Bonus Act 1965:- In this act to maintain peace and harmony between labour and capital by allowing the employees the recognition of their right to share in the prosperity.

37. Fringe Benefits Provident fund Gratuity Medical care Hospitalization Accident relief Health and group insurance Canteen Uniform Recreation and the like