Compensation Administration

Employees exchange work for rewards. Probably the most important reward and cert ainly the most obvious is money. The goals of compensation administration are to design the lowest-cost pay structures that will attract, motivate and retain co mpetent employees, and that also will be perceived as fair by these employees. OBJECTIVES OF COMPENSATION ADMINISTRATION The basic purpose of wage and salary administration is to establish and maintain an equitable wage and salary structure. Its secondary objective is the establis hment and maintenance of an equitable labour-cost structure, i.e., an optimal ba lancing of conflicting personnel interests so that the satisfaction of employee s and employers is maximized and conflicts minimized. A sound compensation admin istration tries to achieve the following objectives: a) For Employees Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequali ties. The chances of favoritism are greatly reduced. Job sequences and lines of promotion are established whenever they are applicabl e. Employees morale and motivation are increased because a wage programme can be exp lained and id based upon facts. b) To Employers They can systematically plan for and control their labour costs. In dealing with a trade union, they can explain the basis of their wage programm e because upon a systematic analysis of job and wage facts. A wage and salary administration reduces the likelihood of friction and grievanc es over wage inequities. It enhances an employees morale and motivation because adequate and fairly admini stered wages are basic to his wants and needs. It attracts qualified employees b ensuring and adequate payment for all the jobs . Basically wage and salary programmes have four major purposes: To recruit persons for a firm. To control payroll costs; To satisfy people, to reduce the incidence of quitting grievances, and fractions over pay, and To motivate people to perform better. FACTORS AFFECTING COMPENSATION STRUCTURE The compensation policies different organizations vary somewhat. A sound policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. Besides the basic factors provi ded by a job description and job evaluation, those that are usually taken into c onsideration are: a) The Organization Ability to pay: Wage increases should be given by those orga nizations, which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher wages than those which running at a loss or ear ning low profits because of the high cost of production or low sales. In the sho rt run, the economic influence on the ability to pay is practically NIL. All emp loyers, irrespective of their profits or losses, must pay no less than their com petitors and need pay no more if they wish to attract and keep workers. In the l ong run, the ability to pay is very important. During the time of prosperity, em ployers pay high wages to carry on profitable operations and because of their in

creased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organizations (like hosp itals and educational institutions) pay relatively low wages because of low or n o profits. b) Supply and Demand of Labour: The labour market conditions or supply and deman d forces operate at the national, regional and local levels, and determine organ izational wage structure and level. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, this la bour market pressures probably force most organizations to "reclassify hard-to-f ill jobs at a higher level" than that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wa ges when it is excessive. Similarly, if there is great demand for labour experti se, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate mar ket forces and factors. c) Prevailing Market Rate: This is also known as the comparable wage or going wage rate , and is the widely used criterion. An organizations compensation poli cies generally tend to conform to the wage-rates payable by the industry and the community. This is done for several reasons. First, competition demands that co mpetitors adhere to the same relative wage level. Second, various government law s and judicial decisions make the adoption of uniform wage rates an attractive p roposition. Third, trade unions encourage this practice so that their members ca n have equal pay, equal work and geographical differences may be eliminated. Fou rth, functionally related firms in the same industry require essentially the sam e quality of employees, with the same skills and experience. This result in a co nsiderable uniformity in wage and salary rates. Finally, if the same or about th e same general rates of wages are not paid to the employees as are paid by the o rganizations competitors. It will not to be attract and maintain a sufficient qua ntity and quality of manpower. Some companies pay on the high side of the market in order to obtain goodwill to insure an adequate supply of labour, while other organizations pay lower wages because economically they have to, or because by lowering hiring requirements they can keep jobs adequately manned. The Living Wage criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favour using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an emplo yee on his contribution rather than on his head. Also, they feel that the level of living prescribed in a worker s budget is open to argument since it is base o n subjective opinion. d) Trade Union s Bargaining Power: Trade unions do affect rate of wages. General ly, the stronger and more powerful the trade union, the higher the wages. e) Job Requirements: Generally, the more difficult a job, the higher are the wag es, Measures of job difficulty are frequently used when the relative value of on e job to another in an organization is to be ascertained. Jobs are graded accord ing to the relative skills, effort, responsibility, and job conditions required. f) Managerial Attitudes: These have a decisive influence on the wage structure a nd wage level since judgement is exercised in many areas of wage and salary admi nistration --- including whether the firm should pay below average, or above ave rage rates, what job factors should be used to reflect job worth, the weight to be given for performance or length of service, and so forth, both the structure and level of wages are bound to be affected accordingly. These matters require t

he approval of the top executives. Top management s desire to maintain or enhanc e the company s prestige has been a major factor in the wage policy of a number of rims. Desires to improve or maintain morale, to attract high-caliber employee s, to reduce turnover, and to provide a high living standard for employees as po ssible also appear to be factors in management s wage-policy decisions. g) Psychological and social Factors: These determine in a significant measure ho w hard a person will work for the compensation received or what pressure he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. Therefore, these things should not b overlooked by the management in establishing wage rates. Sociologic ally and ethically, people feel that "equal work should carry equal wages," that "wages should be commensurate with their efforts," that "they are not exploited , and that no distinction is made on the basis of caste, colour, sex or religion ." To satisfy the conditions of equity, fairness and justice a management should take these factors into consideration. h) Skill Levels Available in the Market: With the rapid growth of industries bus iness trade, there is shortage of skilled resources. The technological developme nt, automation have been affecting the skill levels at a faster rates. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level upto suit the market needs. i) Cost of Living: Next in importance market is the cost of living. This criteri on matters during periods of rising prices, and is forgotten when prices are sta ble or falling. The justification for cost of living as a criterion for wage fix ation is that the real wages of workers should not be allowed to be whittled dow n by price increases. A rise in the cost of living is sought to be compensated b y payment of dearness allowance, basic pay to remain undisturbed. Many companies include an escalatory clause in their wage agreement in terms of which dearness allowance increases or decreases depending upon the movement of consumer price index (CPI). j) Labour Laws: We have a plethora of labour laws at the central as well as the state levels. Some of the central laws which have a bearing on employee remunera tion are the Payment of Wages Act, 1936; the Minimum Wages Act, 1948. The paymen t of Bonus Act, 1965; Equal remuneration Act, 1976; and the Payment of Gratuity Act, 1972. EXECUTIVE COMPENSATION The pay of executives is merely a special case within the topic of compensation, but it does have several twists that deserve attention. First, the base salarie s of executives are higher than those of low-level-managers or operative personn el. Second, executives frequently operate under bonus and stock option plans tha t can dramatically increase their total compensation. A senior executive at Gene ral motors, IBM, Data General, or General Electric may in good year earn $500000 or $1000000 or more on top of his base salary. Executives receive perquisites o r special benefits that others do not. How do organizations justify such extraordinary salaries for their executives? T he answer is simple: economics and motivation. In economic terms, we know that t op managers are expected to demonstrate good decision making abilities. This ski ll is not widely held in our society. As a result, the supply of qualified senio r executives is scarce, and organizations have bid up the price for this talent. High salaries also act to motivate both top level-managers to perform well in o rder to keep their jobs. COMPONENTS OF EXECUTIVE COMPENSATION

a) Base salaries: Base salaries for CEOs are typically determined through compet itive benchmarking, based primarily on general industry salary surveys and supplem ented by detailed analyses of selected industry or market peers. b) Annual Bonus Plans: Virtually every for-profit company offers an annual bonus plan covering its top executives and paid annually based on a single-years perfo rmance. The bonus is mostly computed using a formula, usually taking into accou nt increases in sales and profits. This bonus although earned in the current per iod, is distributed over several years. c) Stock options: Stock options have been common incentive offered to executives . They generally allow executives to purchase, at some time in the future, a spe cific amount of the companys stock at a fixed price. Under the assumption that go od management will increase the companys profitability and, therefore, the price of the stock, stock options are viewed as performance based incentives. d) Perquisites: Executives are frequently offered a smorgasbord of perquisites n ot offered to other employees. The logic of there perks is to attract and keep g ood managers and to motivate them to work hard in the organizations interests. e) Golden Parachute: A popular benefit that accrued to top executives in the ear ly 80s was the golden parachute. It was designed by top executives as a means of p rotecting themselves if a merger took place. These parachutes provide either a s everance salary to the departing executive or a guaranteed position in the newly created (merged) organization.