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  1. Copyright © 2017 by McGraw Hill Education (India) Private Limited Principles of Management, 6e P C Tripathi & P N Reddy Chapter 14 Compensation Plans 1
  2. Copyright © 2017 by McGraw Hill Education (India) Private Limited 2 Learning Objectives  Examine time as the basis of pay  Describe internal and external alignment of wages and salaries and various factors affecting them  Describe the advantages, disadvantages and the kinds of monetary incentive compensation  Present the requisites for the success of monetary incentive compensation  Discuss non-monetary incentives  Explain the statutory and voluntary benefits  Relate the international compensation  Describe the wage packet in Indian industry
  3. Copyright © 2017 by McGraw Hill Education (India) Private Limited Time as Basis for Pay 3  The oldest and most common system of paying employees is on the basis of time, i.e., rate per hour, per day, per week, per month or per year.  The merits of this system are as under:  It is simple and straightforward. Workers can easily calculate their remuneration.  It is liked by trade unions because it does away with differences of payments and assures a guaranteed income for a given period of work.  It helps in maintaining the quality of output because the worker is not tempted to increase his speed to produce more sub-standard output to earn more wages. Continued….
  4. Copyright © 2017 by McGraw Hill Education (India) Private Limited Time as Basis for Pay 4  It helps in maintaining the machines and equipment in good conditions by avoiding breakage and damage to them, which would otherwise result if the speed of operations is unduly increased by workers in order to increase production.  It does not cause employees to overwork themselves, and hence it results in fewer accidents and better employee health.  Following are the demerits of this system:  As this system does not distinguish between efficient and inefficient workers, there is no incentive for workers to improve their efficiency.  As all the workers are paid equal remuneration, irrespective of their quantity of output, the more efficient among them are tempted either to reduce their speed and efficiency or to leave the organization.  As this provides security to the workers, they are tempted to shirk work, which would lead to loss to the employer.  To make employees work without wasting time, the employer is obliged to appoint personnel for supervision, increasing his cost of production.
  5. Copyright © 2017 by McGraw Hill Education (India) Private Limited Classification of Compensation 5  Compensation can be classified into three broad categories: (i) primary (ii) compensation, (iii) incentive compensation and benefits. Total Compensation Primary Benefits Compensation or Pay Incentive Compensation Benefits Monetary Non- Monetary Statutory Voluntary
  6. Copyright © 2017 by McGraw Hill Education (India) Private Limited Primary Compensation 6  It is the basic pay in the form of wages or salaries.  The word “wage” is used to denote payments to hourly rated production workers, and the word “salary” is used to denote payments to clerical, supervisory and managerial employees.  For our purpose, however, this distinction is meaningless because roughly the same problems are involved in the administration of both wage and salary policies. Internal Alignment (Job Evaluation)  A sound primary compensation structure is a function of internal and external alignments.  Internal alignment means that there should be a proper relationship between the wages and salaries of various positions within the enterprise. Internal alignment is concerned with the concept of equity and status. Continued….
  7. Copyright © 2017 by McGraw Hill Education (India) Private Limited External Alignment (Pricing the Job) 7  This means that the enterprise should fix the wages and salaries of its people after taking into account the wage rate prevailing in the community.  To achieve external alignment, the management must first know (either through a wage survey or through some other source) what average rates of its key jobs are prevailing in the community.  It can then plot these rates against the point values of those key jobs.
  8. Copyright © 2017 by McGraw Hill Education (India) Private Limited Factors Affecting Wages 8  Demand and supply of labor Demand and supply conditions of labor have considerable influence on the determination of wage rates. If there is a short supply of labor, the wages may be high; whereas if there is no dearth of labor, the wages tend to be low.  Labor unions If the laborers are well organized into strong trade unions, their bargaining power is high so they can demand higher rates of wages. But if the laborers are not organized, the management may fix low wages.  Cost of living The cost of living of workers also has a strong influence on the rate of wages. If this factor is not considered, the laborers may not be in a position to make both ends meet, and this will affect their efficiency.  Competition The degree of competition for the products of an industry is yet another factor which has influence on the wage rates. If there is perfect competition, the level of wages may be at par with the value of the net addition made by the workers to the total output; but if there is imperfect competition, the wages may not reach this level. Continued….
  9. Copyright © 2017 by McGraw Hill Education (India) Private Limited Factors Affecting Wages 9  Prevailing wage rates By considering the prevailing wage level, employers will come reasonably close to the wage level of competitors, and this will enable them to retain and attract qualified workers to the organization.  Ability to pay The wage level, to a large extent, is determined by the ability of the enterprise to pay its workers. The ability to pay in turn is determined by the profit-earning capacity of the enterprise.  Job requirements Job requirements are also an important factor affecting wages. Jobs requiring specialized knowledge or involving much mental or manual efforts are priced higher than those which are light or which do not need any specialized knowledge.  State regulation As the State assumes responsibility for safeguarding the interest of citizens, it has to step in to regulate the wage rates of laborers through legislative measures.
  10. Copyright © 2017 by McGraw Hill Education (India) Private Limited Factors Affecting Executive Compensation 10  Job complexity  Employer’s ability to pay  Employee’s education and experience  Employee’s performance  Statutory limits
  11. Copyright © 2017 by McGraw Hill Education (India) Private Limited Monitory Incentives 11  Monetary incentive, (which Amitai Etzioni calls “utilitarian power”) is essentially a managerial device of increasing the workers’ productivity.  The belief underlying an incentive compensation is that an offer of money in addition to—rather than in place of—the primary compensation will motivate workers to work harder and more skilfully, which will result in an increased rate of output.  Advantages of monitory incentives include:  The need for direct supervision is reduced.  Results in the creation of a feeling of mutual cooperation amongst the workers.  Rise in workers’ punctuality and attention to work and decrease in absenteeism.  finding better methods and techniques resulting in higher productivity.
  12. Copyright © 2017 by McGraw Hill Education (India) Private Limited Monitory Incentives 12 Disadvantages of Monetary Incentives  The workers to sacrifice quality for the sake of quantity. This calls for a very strict system of checking and inspection.  In the absence of adequate provisions, incentive payment brings about a certain rigidity in the operations. This makes it difficult for management to revise norms and rates following changes in technology, methods, machines, materials, etc.  There is a danger of the workers disregarding safety regulations.  Unless a maximum ceiling on incentive earnings is fixed, some workers tend to overwork and undermine their health.
  13. Copyright © 2017 by McGraw Hill Education (India) Private Limited Kinds of Monetary Incentive Plans 13 The number and type of incentive pay plans is legion. Almost every company has a new “twist” or a added feature to a common basic plan. We may however classify all incentive plans under the following three broad categories:  Individual incentive plans - The simplest of all individual incentives, also called ‘pay for performance’ popular since the scientific management over a hundred years ago, is the simple piece-rate system under which the production worker is paid for each piece produced.  Several new payment-for-performance techniques have been designed  Variable Pay  Merit Pay  Skill pay  Competency Pay
  14. Copyright © 2017 by McGraw Hill Education (India) Private Limited Kinds of Monetary Incentive Plans 14  Group incentive plans - Under this plan, first of all the total earnings for the group are determined and if all the members are of equal skill, these earnings are usually divided among them equally.  Factory wide or plant wide incentive plans - Profit Sharing is a very common example of a plant wide incentive plan. Under a profit sharing plan, a certain percentage of profits is distributed at fixed intervals, usually annually or bi-annually in some definite ratio to all, or the specified categories of employees, over and above their wages. Profit sharing may be current or deferred.  Under current profit sharing, each worker is paid his portion of the profit in cash.  Under deferred profit sharing, the share of profit due to each worker is either credited to his provident fund account or to his pension account or is paid in the form of bonus shares.
  15. Copyright © 2017 by McGraw Hill Education (India) Private Limited Requisites for the Success of a Monetary Incentive Plan 15  The first requirement for the successful introduction of a monetary incentive plan is a proper climate wherein the issues can be dispassionately viewed by all the parties concerned. This means that relations between the management, the supervisory staff and workers should be happy and free from suspicion.  All employees and supervisors must have full knowledge of the details of the plan. The plan should be explained and discussed with them before it is installed.  Employee acceptance and cooperation is much more likely if they have a part in its inception and development. Continued….
  16. Copyright © 2017 by McGraw Hill Education (India) Private Limited 16  The incentive plan should possess the following characteristics:  It should be simple and easy to understand. The benefits of the plan should be quite obvious to the workers concerned. Further, they should be easily calculable by the workers. Complicated plans and formulas sow seeds of doubt and distrust in the workers’ minds.  It should allow for earnings to be in direct proportion to an employee’s output above the work standard. Employees do not like to share their earned extra pay with the management; instead they favor plans where they receive full benefit from their extra effort.  It should be equitable. This means that the plan should cover and should provide equal opportunity to all employees whose jobs can be adapted to the incentive method of payment. Continued… Requisites for the Success of a Monetary Incentive Plan
  17. Copyright © 2017 by McGraw Hill Education (India) Private Limited 17  It should not be very costly in operation. Actually, besides incentive wages, there are many other items of expenditure, such as job evaluation, method- improvement, work measurement, additional supervision, better inventory control, etc.  It should be flexible i.e., it should have the elasticity to take care of technological and other changes taking place from time to time or for rectifying obvious errors that may have crept in at the time of its initial introduction.  A guaranteed base rate should be included in any plan. This constitutes the element of security that employees want. Employees want to be assured that they will receive a minimum given wage regardless of their effort or output. This wage is the minimum base on which they plan their standard of living and home life. Continued… Requisites for the Success of a Monetary Incentive Plan
  18. Copyright © 2017 by McGraw Hill Education (India) Private Limited 18  The plan should not be detrimental to the health and welfare of the employees. This may even involve a ceiling on the maximum earnings by way of incentives.  The plan should be instrumental in satisfying as many needs as possible— other than economic needs—at all levels of hierarchy.  The work standard set for the payment of wage incentives must have the following characteristics:  It should be fair and just: A fair and just standard is the key to any incentive plan, and employees must have confidence in both the technical capacity and the integrity of those who establish these standards. A work standard is usually established by time study.  It should be of average difficulty: If the employees can beat the standards easily, they would hardly experience any competition. Similarly, if the standard is too tight, it makes employees complacent with their pre- incentive earnings. Continued….. Requisites for the Success of a Monetary Incentive Plan
  19. Copyright © 2017 by McGraw Hill Education (India) Private Limited 19  It should be consistent and should not be changed, unless (a) an error has been made in calculation, or (b) a change in work methods, materials or equipments has been effected.  It should be based on established and recognized quality requirements. Employees should not be paid for sub-standard work. In fact, some provision may be necessary to control waste if it is excessive.  Standard working conditions should exist. Standard work method, standard work places, standard materials, standard control procedures, etc. are necessary for any system of incentives. Standardization is the basis of work incentives.  Management must set up a suitable machinery to handle all grievances arising from the implementation of the incentive plan. Continued… Requisites for the Success of a Monetary Incentive Plan
  20. Copyright © 2017 by McGraw Hill Education (India) Private Limited 20  An incentive plan once installed should be rigidly maintained.  Vigilance is the price of success for an incentive plan, which once set up should not be forgotten.  Incentive audit system should, therefore, be devised to assess periodically the effectiveness of the plan against accredited objectives, and to provide feedback information for the management to take corrective steps. Non-Monitory Incentives Non-monetary incentives are necessary to satisfy the social and egoistic needs of workers. Nowadays, a growing number of companies are implementing ‘recognition’ as a non-monetary incentive. Continued…. Requisites for the Success of a Monetary Incentive Plan
  21. Copyright © 2017 by McGraw Hill Education (India) Private Limited 21 Requisites for the Success of a Monetary Incentive Plan High Low Weeks Motive towards doing work Physiology limits of the organism Pressure from foreman Difficulty of work Desire to do fair day’s work Resentment of management Desire for promotion Social pressure of group set rate Fear of loss of job Egoistic drive to accomplish Fear of rate change Reluctance to work too hard Fear of working self out of job Rate of production
  22. Copyright © 2017 by McGraw Hill Education (India) Private Limited 22  The feeling of not getting noticed necessarily disappoints the most ardent desires of human nature. Workers must feel that they are recognized in accordance with their contribution to successes. It is not necessary that this recognition is solely in monetary terms.  Formal recognition system, to be successful, should be:  Valuable for the employees. This can be due to the superior’s position or personality or both.  Tailor-made to meet the specific and changing needs of employees. Like monetary reward, a particular form of recognition reward, after a while, may also begin to lose some of its power. So it has to be altered and different one offered.  Easy to implement  Widely communicated and soliciting new ideas from employees.  Exemplary publishing practices of employees which have earned recognition in the past so that people know what they should do to earn recognition. Recognition as a Reward
  23. Copyright © 2017 by McGraw Hill Education (India) Private Limited 23  Benefits are an important component of the organizational compensation system. Benefit costs range between 30 and 35 percent of wages and salaries. But because they are so common, their value as a reward goes unnoticed. All benefits can be classified in a number of ways.  It should be remembered that most of these benefits (better known as “psychic income” or “fringe benefits”) are system benefits which accrue to people by virtue of their membership in the system.  Unlike incentives which are given in acknowledgement of differential contributions to organizational functioning, these benefits are administered without any relation to individual effort and performance usually on the basis of length of service.  System benefits are most effective for holding members within the organization although they do not lead to work of higher quality or greater quantity than is required to stay in the organization. Benefits
  24. Copyright © 2017 by McGraw Hill Education (India) Private Limited 24  Composition of the wage packet of an Indian worker is very complex. Besides the above benefits its other principal components are: basic pay, dearness allowance, incentive earnings and statutory bonus.  The most prevalent wage incentive scheme is the piece-rate plan, under which workers earn in direct proportion to the work done. Another less prevalent wage incentive scheme is the production bonus under which workers are paid at a differential rate for the output produced in excess of the norms of output fixed for a unit of time.  The minimum bonus is 8.33% of the worker’s annual wage and the maximum is 20%. Recent years have seen all-round increase in the wages and salaries of employees in all sectors in India, particularly IT and finance. To recruit good employees, many companies are promising fancy designations, exciting job profile and career paths (with reduced threshold of experience). Wage Packet of Indian Worker
  25. Copyright © 2017 by McGraw Hill Education (India) Private Limited 25  The objects of international compensation programmes are to:  To attract and retain qualified employees  To facilitate transfers between HQ and affiliates  To create consistency and equity in compensation and  To maintain competitiveness.  Expatriate compensation comprises the following:  Salary—Basic pay plus incentives (merit, profit sharing, bonus plans) determined via job evaluation or competency-based plans  Differentials—These are paid to compensate the expatriate for differences in expenditures between the home and the host country. Housing and hardship allowances fall in this category.  Tax equalization—Expatriates face two potential sources of income tax liability— home and host. Almost all MNEs have some tax protection plan so that the expatriate does not pay more in taxes than if he were in his own country. Tax equalization is an adjustment in expatriate’s pay which reflects tax rates in the home country.  Assistance programmers—These are expenditures commonly incurred by an expatriate on his relocation, e.g., expenditure incurred on household goods shipping, legal clearance, prelocation visits, annual home visits, children’s education, etc. International Compensation