15-01-2013, 04:27 PM
COMPENSATION MANAGEMENT
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Meaning of Compensation
Compensation management, also known as wage and salary
administration, remuneration management, or reward management, is concerned
with designing and implementing total compensation package. The traditional
concept of wage and salary administration emphasised on only determination of
wage and salary structures in organisational settings. However, over the passage
of time, many more forms of compensation as discussed earlier, entered the
business field which necessiated to take wage and salary administration in
comprehensive way with a suitable change in its nomenclature. Beach has
defined wage and salary administration as follows:
"wage and salary administration refers to the establishment and
implementation of sound policies and practices of employee
compensation. It includes such areas as job evaluational, surveys of
wages and salaries, analysis of relevant organisational problems,
development and maintenance of wage structure, establishing rules for
administering wages. wage payments, incentives, profit sharing, wage
changes and adjustments, supplementary payments, control of
compensation costs and other related items"
Concept of Compensation
The literal meaning of compensation is to counter-balance. In the case of
human resource management, compensation is referred to as money and other
benefits received by an employee for providing services to his employer. Money
and benefits received may be in different forms-base compensation in money
fonn and various benefits, which may be associated with employee's service to
the employer like provident fund, gratuity, insurance scheme and any other
payment which the employee receives or benefits he enjoys in lieu of such
payment. Cascio has defined compensation as follows:
"Compensation includes direct cash payments, indirect payments in the
form of employee benefits and incentives to motivate employees to strive
for higher levels of productivity”
Based on above description of compensation, we may identify its various
components as follows:
1. Wage and Salary: Wage and salary are the most important component of
compensation and these are essential irrespectiveof the type of
organisation. Wage is referred to as remuneration to workers particularly,
hourly-rated payment. Salary refers to as remuneration paid to white-collar
employees including managerial personnel. Wages and salary are paid on
the basis of fixed period of time and normally not associated with
productivity of an employee at a particular time.
2. Incentives: Incentives are the additional payment to employees besides
the payment of wages and salaries. Often these are linked with
productivity, either in terms of higher production or cost saving or both.
These incentives may be given on individual basis or group basis.
3. Fringe Benefits: Fringe benefits include such benefits which are provided
to the employees either having long-term impact like provident fund,
gratuity, pension; or occurrence of certain events like medical benefits,
accident relief, health and life insurance; or facilitation in performance of
job like uniforms, Canteens, recreation, etc.
4. Perquisites: These are normally provided to managerial personnel either
to facilitate their job performance or to retain them in the organisation.
Such perquisites include company car, club membership, free residential
accommodation, paid holiday trips, stock options, etc.
Objectives of Compensation Management
The basic objective of compensation management can be briefly termed
as meeting the needs of both employees and the organisation. Since both these
needs emerge from different sources, often, there is a conflict between the two.
This conflict can be understood by agency theory which explains relationship
between employees and employers. The theory suggests that employers and
employees are two main stakeholders in a business unit, the former assuming the
role of principals and the latter assuming the role of agents. The compensation
paid to employees is agency consideration. Each party to agency tries to fix this
consideration in its own favour. The employers want to pay as little as possible
to keep their costs low. Employees want to get as high as possible. The
compensation management tries to strike a balance between these two with
following specific objectives:
Attracting and Retaining Personnel:
From organisation's point of view, the
compensation management aims at attracting and retaining right personnel in the
organisation. In the Indian corporate scene, there is no dirth of personnel at
operative levels but the problems come at the managerial and technical levels
particularly for growing companies. Not only they require persons who are well
qualified but they are also retained in the organisation. In the present day
context, managerial turnover is a big problem particularly in high knowledgebased
organisations.
Motivating Personnel:
Compensation management aims at motivating
personnel for higher productivity. Monetary compensation has its own
limitations in motivating people for superior performance. Alfie Kohn has gone
to the extent of arguing that corporate incentive plans not only fail to work as
intended but also undermine the objectives they intend to achieve. He argues
that this is due to inadequate psychological assumptions on which reward
systems are based. His conclusions are as follows:
A. Rewards punish people-their use confirms that someone else is in control
of the employee.
Organisation's Strategy:
Organisation's overall strategy. though not a step of
compensation management is the starting point in the total human resource
management process including compensation management. Companies
operating in different types of market/product having varying level of maturity,
adopt different strategies and matching compensation strategy and blend of
different compensation methods. Thus, it can be seen that organisations follow
different strategies in different market situations and align their compensation
strategy and contents with these strategies. In a growing market, an organisation
can expand its business through internal expansion or takeover and merger of
other organisations in the same line of business or a combination of both. In
such a growing market, the inputs, particularly human resources, do not grow in
the same proportion as the business expands. Therefore, in order to make the
growth strategy successful, the organisation has to pay high cash to attract
talents. For example, information technology is a fast growing business
presently and we find maximum merger and higher managerial compensation in
this industry. In mature market, the organisation does not grow through
additional investment but stabilises and the growth comes through making the
present investment more effective, known as learning curve growth. In such a
situation, average cash and moderate incentives may work. The benefits which
have been standardised have to be maintained. In the declining market, the
organisation has to harvest profit through cash generation and cost cutting and if
this cannot be sustained over the long run, the possible retrenchment of business
to invest somewhere else. In such a case, compensation strategy involves cost
control with below average cash and incentive payments.
Following are the demerits of this system
1. This system does not distinguish between efficient and inefficient
workers. All workers are paid equal remuneration irrespective of their
quantity of output. Hence the more efficient among them either reduce
their speed and efficiency or leave the organization.
2. In order to make the labourers work without wasting their time,
supervision becomes necessary. This increases cost of production.
Nominal and Real Wages:
Wages can be expressed in two ways. When they are expressed in terms
of money paid to the worker they are called nominal wages. But when they are
expressed in terms of their purchasing power with reference to some base year
they are called real wages. These wages are arrived at by making adjustment in
the nominal wages for the rise or fall in the cost of living. Thus, if the nominal
wage of a worker in 1984 was Rs.400p.m. and in 1994 it is Rs.900 p.m. but if
the living in 1994 has become thrice as costly as in 1984 the real wage of the
worker in 1994 is Rs.300 only.
How do we measure changes in the cost of living, or changes in the
prices that consumers pay? The measuring rod is the consumer price index
number. This index number is intended to show over a period of time the
average percentage change in the prices paid by the consumers belonging to the
population group proposed to be covered by the index for a fixed list of goods
and services consumed by them. The average percentage change, measured by
the index, is calculated month after month with reference to a fixed period. This
fixed period is known as the ‘base period’ of the index; and since the object of
the index is to measure the effect of price changes only, the price changes have
to be determined with reference to a fixed list of goods and services of
consumption which is known as a fixed basket of goods and services.