1. SUBJECT CODE &
MU0015 –Compensation and Benefits
Q: 1 What do you mean by Compensation Management? Explain the non-compensation
Meaning of compensation management:
AnsHuman resource is the most vital resource of an organization as it handles all the physical resources therein and takes
the responsibility of decision making, work done and achievement of results etc. So, to carry on these heavy responsibilities,
employees should be motivated by providing the best remuneration and compensation package as per the industry
standards. Lucrative compensation is a means of attracting and retaining the best talents in an organization.
Compensation is the total amount of the monetary and non-monetary pay provided to an employee by
an employer in return for work performed as required.
Compensation is based on:
market research about the worth of similar jobs in the marketplace,
employee contributions and accomplishments,
the availability of employees with like skills in the marketplace,
the desire of the employer to attract and retain a particular employee for the value they are perceived to add to
the employment relationship, and
the profitability of the company or the funds available in a non-profit or public sector setting, and thus, the ability of an
employer to pay market-rate compensation.
Compensation also includes payments such asbonuses, profit sharing, overtime pay, recognition rewards and
checks, and sales commission. Compensation can also include non-monetary perkssuch as a company-paid
car, stock options in certain instances, company-paid housing, and other non-monetary, but taxable,
Compensation is an integral part of human resource management. It is the remuneration received by an employee in return
to his or her contribution for the organization. A good compensation system evolves a balanced work-employee relationship
by providing monetary and non-monetary benefits to the employees. In this way, it acts as a motivating factor to the
employees and increases the organizational effectiveness.
IMPORTANCE OF COMPENSATION
The Compensation system has a great significance in a business organization. Men is the most important factor among four
M’s, i.e. Men, Material, Machine and Money. The responsibility of managing the other three factors is handed over to Men.
So, nobody can imagine a business process without Men.
Labourers bring motion to the process of production/business in an organization. Moreover as a human being, they also
have expectations, emotions, ambitions and egos for which they want to have a fair share in the production process.
Therefore a fair compensation system is must for every business organization which helps in the following way:
1. An ideal compensation system has a positive influence on the efficiency of employees and encourages the employees to
perform better and achieve the preset standards.
2. It augments the job evaluation process which in turn helps in setting up the more realistic and achievable standards.
3. Such a system is well defined and uniform to all the employees of an organization as a general system.
4. It is easy to implement and abide by the principle of equal pay.
5. The system is so simple and flexible that an employee can compute his compensation receivable by himself.
6. The compensation system tries to give appropriate return to the workers for their contributions to the organization.
7. It arouses an environment of morale, efficiency and cooperation among the workers and provides satisfaction to the
8. The compensation system is designed complying with the various labour acts and therefore does not result in disputes
between the employee’s union and the management. This builds up a peaceful relationship between the employer and the
9. It stimulates the employees to perform better and show their excellence.
10. It forces the employees to work hard and efficiently to survive in the competitive environment. The system also provides
the growth and advancement opportunities to the deserving employees.
11. The perfect compensation system is a source of happiness and satisfaction for the workforce that minimizes the labour
turnover and confers a stable organization
2. COMPENSATION DIMENSIONS
Figure 1.5: Compensation dimensions
Payment for work and performance includes the disbursement of money within a short-term period (weekly,
monthly and bonus/annual awards) that will allow an employee to pay or make an agreement to pay for products
and services requested. The total amount of payment given to the employee will depend on the following:
Needs for the specified job.
Results that meet or exceed the standards of quantity, quality or time.
Innovations that lead to the increase in productivity, loyalty, trustworthiness and a combination of some
or all of these features.
The components that are usually included in the payment for work and performance are basic pay, premium and
premium differences, short-term bonus, merit payment and certain allowances.
The past few years have seen a reduction in working hours. In addition, employees today enjoy more official nonworking days and longer paid leave. Components of payment for non-working days raise labour costs. On the
other hand, such payment allows for lifestyle change and enhancement of the quality of life.
Job security has always been an important aspect of employment. Employees need to be assured of their job and
economic security. Accidents, personal problems, work performances are some of the reasons that will cause a
The change in the current technological and economic climate will limit, and at times eliminate, the need and
demand for certain products and services. This will lead to the reduction or disintegration of an organisation.
Various components, like unemployment insurance, unemployment added-benefits and salary during the
severance period, have been generated to assist affected employees who have neither been offered any
alternative position by the organisation, nor found other work.
When an employee suffers from a disability due to an illness or accident, he is unable to execute his tasks
Employee compensation, in the form of medical leave and short-term and long-term disability plans, exists to
assist an employee who is incapable of working due to poor health.
Most employees depend on programmes provided by their employers to ensure a continuous income after
retirement. There are two main reasons why such programmes exist. First, most people do not have enough
savings upon retirement to enable them to continue enjoying the comfortable lifestyle they were accustomed to
when they were working.
Employees with families worry that they will not be able to provide and care for and support their dependants in
the event of their death or disability. To this end, certain plans have been created to provide the dependants with
the financial means to go on if an employee dies or is incapacitated due to temporary or permanent disability.
Apart from income to sustain a comfortable lifestyle, income for products and services to heal an illness or
disability is also of great concern to employees. Therefore, an organisation offers various insurance plans to
assist employees in paying for their medical care and treatment.
Income equivalent payments are also known as perquisites or perks. Some of these special benefits are
exempted from tax, and this is advantageous for employers and employees. Examples of special benefits are
provision of credit cards, allowance to attend official meetings, subsidized food and childcare services.
the classification of Employee Benefits. What are the factors that influence the
choice of a benefit program?
Ans:Employers typically provide their workers with a variety of benefits in addition to
Wages and salaries. These are commonly called “fringe benefits.” Fringe benefits include all
types and sizes of benefits such as employee discounts, club memberships, employer-provided
meals, educational assistance as well as pension and health plans. Under the general tax rule,
workers are taxable on the fair market value of fringe benefits and employers may deduct their
benefit costs every year, unless a specific tax statute provides otherwise. [IRC § 61(a) defines
taxable income to workers and includes “compensation for services, including ... fringe
benefits,” IRC § 162(a) permits employers a deduction for reasonable “salaries or other
compensation for personal services,” andIRC § 132 excludes certain types of fringe benefits
“Employee benefits “are a special subset of fringe benefits. There is no single definition for
this term but it typically refers to employer-sponsored plans that are subject to the Employee
Retirement Income Security Act of 1974 (“ERISA”) and have special tax rules. ERISA
contains technical definitions for the term “employee benefit plans”
Under ERISA § 3(1), a welfare plan is a plan that provides benefits for:
• medical, surgical or hospital care
• sickness, accident, disability or death
• unemployment benefits
• vacation benefits
• apprenticeship or training programs
• day care centers
• scholarship funds (if funded)
• prepaid legal services
• holiday and severance pay plans.
Under ERISA § 3(2)(A), a pension plan is a plan that:
4. • provides retirement income to employees, or
• results in the deferral of income until retirement or thereafter.
ERISA Reg. § 2510.3-2 excludes the following from the definition of a pension plan:
severance pay and supplemental pay plans treated as welfare plans; bonus programs; and
IRAs andtax-sheltered annuities not sponsored by an employer.
Q:3Suppose you are a HR Manager and you are asked to develop an effective Incentive
Scheme for your organization. What are the pre-requisites you will consider while
developing an Effective Incentive Scheme?
Ans:The elements of a successful incentive plan,
franchise are all the same:
1. Determine what the plan intends to accomplish. Identify, in detail, the
improvable conditions desired, and the likely, attainable behaviors necessary to
achieve them. Analyze for appropriateness in your environment.
And really determine what you want. Be specific, because in compensation, it’s
not what you wish for, hope for, or even plan for… it’s what you pay for that
you get. An example: A client wanted to reduce worker’s compensation claims
and their subsequent costs in two of their facilities. They simply created a
“safety bonus” of 10% of the manager’s pay, reduced by 3% for the first
accident, and 7% for the second.
2. Determine participants. Realize that missing a key employee or position can
put a wrench in the viability and success of the entire plan. Consider more
inclusion than exclusion.
The key to success in incentives – the basis of which behavior is changed – is
that the right people must be motivated to do the right things.
If you exclude a group of people, specifically, from an applicable incentive,
don’t be shocked when they don’t put that particular goal achievement at the
very top of their daily “must-do” list.
3. Develop clear performance goals. These should be simple, supported by
historic, valid information, and clearly quantifiable. Think 2-3 total goals – the
fewer the better. If you exceed 4 or 5, you’ve gone too far, and are trying to do
too much with the plan. Model the potential payouts to ensure affordability.
Be realistic. Be prepared to pay for incremental improvement, not just home
runs. I was working with a metal smelter once; we were implementing a
gainsharing plan whereby line employees would share in all financial
improvements from a predetermined threshold.
.4. Determine logistics. This includes dates of incentive consideration, payout
dates, what is and isn’t considered, plan revision procedures, termination
payouts, and effective dates of the plan.
ALL PLANS SHOULD HAVE A STARTING DATE AND ENDING DATE. Two
reasons: you’re giving yourself an automatic review cycle, and it lessens the
likelihood that the incentive plan will morph into an entitlement with
5. participants. We want incentives to always remain something extra, don’t we?
Don’t even get me started on how many incentive plans I’ve encountered that
evolved into a bonafide employee entitlement.
5. COMMUNICATE. Effective and thorough communications cannot be
over-emphasized. Participants must realize the attention given to the incentive
plan, clearly understand its parameters and intent, and have ample knowledge
to successfully achieve those behaviors necessary to reach various incentive
Tell participants, in plain, easy-to-understand English, what the plan is designed
to do, and what your expectations are for their performance within the plan.
Sort of like the “whereas” parts of the recitals at the beginning of a contract.
Further, the communication should be brief, and again, easy to understand. If
you need four pages for an incentive plan, I’ll tell you what you have: One page,
maybe a page and a half, for the actual “who does what, and who gets paid”
part; the rest to tell participants how they can lose out under myriad conditions.
6. Rinse and Repeat. Evaluate the success and/or failures of the plan. Determine
what worked, what didn’t, and what can easily be modified or improved for
better results. Check payouts against modeling done earlier for accuracy and
Don’t rely solely on a consultant’s expertise (even mine, it kills me to say).
Make sure it passes your own sniff test, and that real dollars are appropriately in
play, on both the incentive target side, and the payout side.
Reward levels are determined by the triangulation of desired results, employee
efforts, and financial impact (savings versus costs). Dig deeper than most, and look to share
something closer to 30-40% of
savings/additional revenue; if employees believe you are simply enjoying a windfall
for their efforts, while providing them just a few extra peanuts in their box, they’ll
eventually rebel, and performance will reverse.
Research indicates that broad-based incentive plans can be utilized as a means to
encourage both employee performance and productivity. When implementing an
incentive plan, several considerations are needed to ensure the plan is successful.
However, it is important to note that incentive plans cannot ensure employee productivity
by themselves. They must be coupled with effective human resources practices in order
to ensure a successful work environment. These include determining the appropriate
rewards, instituting comprehensive performance management systems, widespread and
effective communication, as well as buy-in from top management to support the
Q:4Define Pay Structure. What are its objectives? Explain the major decisions involved
in designing and setting competitive pay structures
Ans: What is a pay structure?
6. A pay structure is a collection of pay grades, levels or bands, linking related jobs within a hierarchy or
series, that provides a framework for the implementation of reward strategies and policies within an
Salary structures are an important component of effective compensation programs and help ensure that
pay levels for groups of jobs are competitive externally and equitable internally. A well-designed salary
structure allows management to reward performance and skills development while controlling overall
base salary cost by providing a cap on the range paid for particular jobs or locations
Pay structures may be designed to achieve several objectives:
to align reward strategy with the business strategy of the organisation, such as encouraging high
to bring order and clarity to an organisation and its employees in managing pay increases and
to help ensure fairness and lawfulness, for example by adopting an approach that avoids gender
discrimination in pay.
While some smaller organisations manage without any form of pay structure at all, larger or growing
organisations, typically once they have reached around 200-250 employees, usually find such
arrangements essential as a framework for reward management.
DESIGNING PAY LEVELS, MIX AND PAY STRUCTURES
1. Identify the major decisions in establishing externally competitive pay.
2. Describe the purpose(s) of a salary survey.
3. Discuss the importance of defining the relevant market in a pay survey.
4. Explain the steps involved in designing a pay survey.
5. Describe the key issues involved in interpreting the results of a pay survey.
6. Explain how the market pay line combines the internal structure with external market rates.
7. Discuss the use of pay grades and pay ranges and their relationship to internal alignment and
8. Discuss the pros and cons of the market pricing approach to establishing a pay structure.
7. I. MAJOR DECISIONS
A. There are seven major decisions involved in setting externally competitive pay and designing
the corresponding pay structures
1. specifying employer's external/competitive pay policy
2. define the purpose of the survey
3. select the relevant market competitors
4. designing and conducting surveys
5. interpreting survey results and constructing the market line
6. constructing a pay policy line that reflects the external pay policy
7. balancing competitiveness with internal alignment through the use of ranges, flat rates, and/or
Definition: A survey is the systematic process of collecting and making judgments about the
compensation paid by other employers
Steps in conducting wage and salary surveys:
1. select the jobs to be surveyed
2. define the relevant markets
3. select the firms to be surveyed
4. determine the information to ask
5. determine the data collection technique
6. administer the survey
Q:5Explain the process of designing a successful Reward Strategy
Ans: The best reward strategies reflect the needs of the organisation and its employees, they underpin
organisational and HR strategy and allow costs to be controlled through a flexible approach. So many
organisations stumble at the first hurdle when it comes to designing a reward strategy which will work for
them. There are many reasons for this, which may include:
A lack of clarity on the strategic direction of the company.
The corporate identity and/or organisational branding are not clearly defined.
There has previously been an ad hoc approach to reward.
There is little understanding of what ‘market rates’ are or what level of reward will motivate and retain the
There is a lack of flexibility due to collective agreements or established policy.
There is a focus on specific elements of reward, such as pay and overtime, with little acknowledgement of
the total reward package and of the importance of non-financial rewards.
The best reward strategies should achieve a combination of things; not least an ability to control what is
often the biggest overhead to any organisation.
The aims and objectives of any reward strategy from the outset must achieve the following:
8. Integration, integration, integration! Not only must the reward strategy fully support and complement
the organisational strategy, it must also be integrated with other HR activities, such as Performance
Management and Learning and Development in order to be successful. Policies which are created in
silos usually can create conflict. For example, performance management objectives and competency
measures which focus on team working and collaboration should be complemented by a reward strategy
which recognises and reinforces team performance.
Improvements driven. The success of the reward strategy will be dependent on how well it drives
individual and team performance, and ultimately organisational success. Measures including
attrition/turnover rates, exit interview data and staff opinion surveys can build a picture of the
effectiveness of the reward strategy.
Financial control. The salary bill is invariably the biggest overhead to any business. Reward policy must
be sustainable even during more challenging economic times, in order to be successful. The ability to
flex discretionary elements of pay, such as bonuses, is a key consideration.
What is Total Reward?
There are a number of different models of ‘Total Reward’ which in essence describes the entire offer to
the employee in exchange for their work. A useful model is the Segal / Sibson model which examines
the balance between the rewards that employers offer and the expectations they set in exchange for
those rewards. Five types of rewards are identified which can form part of total reward; these are:
Base salary, incentives, pay process and transparency.
Health, retirement, time off, work-life balance and training /development.
Working relationships, reputation, community citizenship and culture.
Variety, challenge, structure, autonomy and feedback.
Promotion, status, personal growth, training and employment security.
a short note on the following:
a)Wage Policy Plan in India
b)Voluntary Retirement Scheme(VRS)
Ans:a)Wage Policy Plan in India