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Compensation management
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Compensation Management Defined

Reward management is concerned with the formulation and implementation of strategies and policies in order to reward people fairly, equitably and consistently in accordance with their value to the organization. It deals with the development of reward strategies and the design, implementation and maintenance of reward systems (reward processes, practices and procedures) which aim to meet the needs of both organization and its stakeholders. Reward can be regarded as the fundamental expression of the employment relationship. 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:

Wage and Salary: Wage and salary are the most important component of compensation and these are essential irrespective of the type of organization. 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.

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.

Fringe Benefits: Fringe benefits include such benefits which are provided to the employees either having long-term impact like provident fund, gratuity, pension; or
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occurrence of certain events like medical benefits, accident relief, health and life insurance; or facilitation in performance of job like uniforms, Canteens, recreation, etc.

Perquisites: These are normally provided to managerial personnel either to facilitate their job performance or to retain them in the organization. Such perquisites include company car, club membership, free residential accommodation, paid holiday trips, stock options, etc.

2. Objectives in compensation management

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 higher turnover. Ensure equity. 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 means paying workers what comparable workers are paid by other firms in the labor market. Reward desired behavior. Pay should reinforce desired behaviors and act as an incentive for those behaviors to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility, and other behaviors. Control costs. A rational compensation system helps the organization obtain and retain workers at a reasonable cost. Without effective compensation management, workers could be overpaid or underpaid. Comply with legal regulations.
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A sound wage and salary system considers the legal challenges imposed by the government and ensures the employer's compliance. Relevant legal regulations imposed by the government include followings.
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The Shop and Office Employees (Regulation of employment & remuneration) Act Wages Board Ordinance Employees provident Fund Employees Trust Fund Payment of Gratuity Act Factories Ordinance Workmens Compensation Ordinance Industrial Disputes Act Termination of Employment (Special provisions) Act Trade Union Ordinance Employment of Women, Young Persons and Children Act Maternity Benefits Ordinance

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For example, by ensuring that the organizations compensation packages meet the minimum wage requirements as shown below etc.., the organization can prove the employers compliance. Industry Plantation Sector Plus Attendance Bonus Plus productivity incentive Industrial Sector Unskilled Semi Skilled Skilled Service Sector Unskilled Semi Skilled Skilled Worker Category Minimum wages 380 per day 105 per day 30 per day 6500-7500 per month 7000-8000 per month 7500-9500 per month 6500-7500 per month 7500-8000 per month 8400-9500 per month

o Overtime is paid at One and Half times the normal hourly rate of wage.
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o Holiday pay for work on weekends (Sundays) and public holidays is paid for at a higher rate 1 1/2 times the daily rate or double the rate of remuneration. o Bonuses e.g. project, attendance, festival would vary from company to company. There is no statule law sourning these payments

3. Importance of a compensation system

A fair compensation system will help in the following:
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An ideal compensation system will have positive impact on the efficiency and results produced by employees. It will encourage the employees to perform better and achieve the standards fixed.

It will enhance the process of job evaluation. It will also help in setting up an ideal job evaluation and the set standards would be more realistic and achievable.

Such a system should be well defined and uniform. It will be apply to all the levels of the organization as a general system.

The system should be simple and flexible so that every employee would be able to compute his own compensation receivable.

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It should be easy to implement, should not result in exploitation of workers. It will raise the morale, efficiency and cooperation among the workers. It, being just and fair would provide satisfaction to the workers.

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Such system would help management in complying with the various labor acts. Such system should also solve disputes between the employee union and management. The system should follow the management principle of equal pay. It should motivate and encouragement those who perform better and should provide opportunities for those who wish to excel.

Sound Compensation/Reward System brings peace in the relationship of employer and employees.
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It aims at creating a healthy competition among them and encourages employees to work hard and efficiently.

The system provides growth and advancement opportunities to the deserving employees.

The perfect compensation system provides platform for happy and satisfied workforce. This minimizes the labour turnover. The organization enjoys the stability.

The organization is able to retain the best talent by providing them adequate compensation thereby stopping them from switching over to another job.

The business organization can think of expansion and growth if it has the support of skillful, talented and happy workforce.

The sound compensation system is hallmark of organizations success and prosperity. The success and stability of organization is measured with pay-package it provides to its employees.

4. The Reward System

A reward system consists of a number of interrelated processes and activities which combine to ensure that reward management is carried out effectively to the benefit of the organization and the people who work there. The processes and activities includes the following
4.1 Analyze business strategy and business needs

4.2 Develop HR strategy

4.3 Develop and justify Reward Strategy and define guideline principles

Reward strategy is a declaration of intent which defines what the organization wants to do in longer term to develop and implement reward policies, practices and processes which will further the achievement of its business goals and meet the needs of its stakeholders. It provides a sense of purpose and direction and a framework for developing reward policies, practices and process.

4.3.1

Content of Reward Strategy

Broad-brush reward strategy A Broad-brush reward strategy may commit the organization to the pursuit of a total reward policy. The basic aim might be to achieve an appropriate balance between financial and non-financial rewards. This specifically elicits the employee behaviors that the firm needs to support and to achieve its competitive strategy.

Additionally or alternatively, Reward Strategy may set out a list of specific intentions dealing with particular aspects of reward management. 4.3.2 Components of an effective reward strategy

They have to have clearly defined goals and a well-defined link to business objectives. There have to be well-designed pay and reward programs, tailored to the needs of the organization and its people, and consistent and integrated with one another. Perhaps most important and most neglected, there needs to be effective and supportive HR and reward processes in place. 4.3.3 Reward guiding principles Guiding principles define the approach an organization takes to deal with reward. They are the basis for reward policies and provide guidelines for actions contained in the reward strategy. 4.3.3.1 Reward policies Reward policies address the following broad issues:

The level of rewards taking into account market stance how internal rates of pay should compare with market rates; Achieving equal pay; The relative importance attached to external competitiveness and internal equity; The approach to total reward; The scope for the use of contingent rewards relates to performance, competence, contribution or skill; The role of line managers:

Transparency- the publication of information on reward structures and processes to employees

Example Reward policy issues may include; Pay for performance Pay for seniority Salary increases and promotions Overtime and shift pay Probationary pay Paid and unpaid leaves Paid holidays Geographic costs of living differences/ hardships

5. Total Reward
5.1 Components of employee compensation There two types of rewards; Financial (extrinsic) and Non-Financial (intrinsic). Porter and Lawler suggest both are necessary for generating job satisfaction related to performance.

Financial rewards/ direct compensation Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time. Base Pay is a certain payment connected with a job, usually given on a time basis (hourly, weekly, monthly or yearly). Variable Pay is dependent on performance of individual, team or organisation and cannot become a part of the basic pay Employee Benefits are made up of options like insurance, stock options, company cars, pension-schemes and holidays.

Basic Salary Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services. House Rent Allowance
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Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work. Conveyance Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them. Leave Travel Allowance These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization. Medical Reimbursement Organizations also look after the health conditions of their employees. The employees are provided with medi-claims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements. Bonus Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one months salary of the employee. Special Allowance Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.

Non Financial Rewards/ Indirect compensation Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.
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One of the most important aspects of intrinsic rewards is Job satisfaction. If a person is not satisfied from what he does, his performance gets affected thus damaging the performance of whole team and in turn, the organization. Feedback and recognition; the praise and recognition given to an employee for any good work is viewed positively and for some employees, existence of responsibility and autonomy in their jobs is a form of intrinsic reward. Development, both at personal level and career level are important forms on intrinsic rewards.

Leave Policy It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc. Overtime Policy Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. Hospitalization The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.

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Insurance Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization. Leave Travel The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free. Retirement Benefits Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age. Holiday Homes Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house. Flexible Timings Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons. 5.2 The Wage Concept There are three different concepts of wages: the minimum wage, the fair wage and the living wage. The minimum wage is the least of them all and the living wage, the highest. Minimum wage is the base wage that an employee has to be paid to fulfill his basic needs and provide basic amenities for his family. The fair wage takes into consideration the paying capacity of the employer. The living wage, which is the highest of the three, is aimed at providing a comfortable living for the employee and his family. It includes providing health, educational and social facilities. Traditional wage plans include the piece-wage plan, based on the units produced by the employee and the time-wage plan, based on the total working time of the employee. Modern wage plans include skill-based wage plan, competency-based wage plan and broadbanding. Wage differentials can be defined as the difference in wages paid for same or similar work
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because of various reasons like differences in work schedules, hazards involved, cost of living, or other factors.

5.2.1 Factors Affecting Wages On the basis of above discussion, we may summarise the factors affecting wage rates as under:

Demand for and supply of labour: Demand and supply conditions of labour have considerable influence on the determination of wage rates. If there is a short supply of labour, the wages may be high whereas if there is no dearth of labour, the wages tend to be low.

Labour unions: If the labourers are well organized into strong trade unions, their bargaining power would be high and they can demand higher rates of wages. On the other hand, if the labourers 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 labourers may not be in a position to make both ends meet and this will affect their efficiency. Hence progressive employers consider this factor also.

Prevailing wage rates: Prevailing wages in a particular industry are also taken into account by the employers while deciding wage levels for their employees. By considering the prevailing wage level, employers will come reasonable close to the wage level of competitors, and this will enable them to retain and attract qualified workers to the organizations.

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 profitearning 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 effort are priced higher than those which are light or which do not need any specialized knowledge.

State regulation: State regulation is another important factor influencing wage rtes. As the State assumes responsibility for safeguarding the interest of citizens, it has to step in to regulate the wage rates of labourers through legislative measures.
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Increment system: In some organizations wages automatically increase annually at a prescribed rate without any relation to workers performance. In some other organizations annual increases based on merit. Thus, the prevailing system of granting increments also affects wages.

6. Requisites

of sound primary compensation structure

Internal Equity External equity and External competitiveness Performance based payment: Individual equity

Equity issues can be addressed by different methods.

Job analysis and job evaluation can carry out to determine the worth of each job in the organization to ensure internal equity is achieved. Can conduct salary surveys to ensure external equity Make sure individual equity is achieved by performance appraisal and incentive pay Proper two way communications, grievance mechanism and employee participation further address the equity issues

6.1. Internal Equity and Job Evaluation Internal Equity means that there should be proper relationship between the wages and salaries of various positions within the enterprise. Mechanism we can use here is job evaluation. Job valuation is a process of determining the relative worth of a job. It is a process which is helpful even for framing compensation plans by the personnel manager. Therefore the main objective of job evaluation is to have external and internal consistency in salary structure so that inequalities in salaries are reduced. 6.1.1 Job Evaluation is Defined International Labour Organisation (ILO) has defined job evaluation as follows:

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"Job evaluation is an attempt to determine and compare demands which the normal performance of a particular job makes on normal workers without taking into account the individual performance of the workers concerned" The definition of job evaluation provided by ILO has been adopted by others. For example, French has defined job evaluation as follows: "Job evaluation is a process of determining the relative worth of the various jobs within the organisation. so that differential wages may be paid to jobs of different worth. The relative worth of a job means relative value produced. The variables which are assumed to be related to value produced are such factors as responsibilities, skills, efforts and working conditions" 6.1.2 Advantages of Job evaluation It is an objective and logical method of ranking jobs and removing unjust differentials. 2. It helps in fitting new jobs at their appropriate plane in the existing wage It improves labour- management relations by reducing grievances. It establishes on objective and clear basis for wage bargaining. It simplifies wages administration It reveals the possibilities of more efficient use of the plant labour force. structure.

6.1.3 Methods of Job Evaluation There are four basic methods of job evaluation: ranking method, job grading method, point method and factor comparison method. The first two methods are non-quantitative and also known as traditional, non-analytical or summary methods. The other two methods are quantitative, also known as analytical methods, and use various quantitative techniques in evaluating a job. 6.1.3.1 Ranking Method In the ranking method, a whole job is compared with others and rank is provided on the basis of this comparison. The usual process followed in this method is as under:

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On the basis of job analysis, each member of the job evaluation committee

ranks each job independently either against the benchmark job or against all other jobs. The ranking is provided to the job on the basis of this comparison.

In order to increase the reliability of ranking, this exercise is undertaken twice or thrice by the members. If there are significant differences of opinions among the members about the ranking of a particular job, the matter is settled by mutual consultation, or by working out the average.

Ranking method has certain facial merits and demerits. Some of these are as follows Merits

The method is comparatively simple, easily understandable, and mostly acceptable by labour unions. It is suitable for comparatively smaller organisations which may not like to undertake more laborious exercises.

The method is less costly to undertake and maintain as compared to other systems.

Demerits Since ranking method of job evaluation is qualitative and non-analytical it suffers from the following limitations:

Ranking method is judgemental and, therefore, it is affected by personal preferences of job evaluators. This method ranks various jobs in order of their relative worth. It does not specify the real difference between two jobs.. For example, the exact difference between job ranked at first and the job ranked at second cannot be specified.

6.1.3.2 Grading/ Job Classification Method This method establishes various grades for different categories of jobs. For example, jobs of an operative may be classified as unskilled, semi-skilled, skilled and highly-skilled. The process followed in this method is as follows:

At the initial stage. a number of job classes or grades is decided on the basis of

job analysis. Job grades can be determined on either of two bases. First, all jobs may first be ranked and their natural classes may be determined. The description of each job
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class is prepared covering all jobs falling in a class. Second, the job evaluation committee may prepare a series of job class description in advance on the basis of which various jobs may be graded.

Different characteristics of each job are matched with description of job class

and a job is placed in the class with which it matches best. Merits Grading system of job evaluation particularly in government jobs is quite popular as this has certain merits over the ranking method. These are as follows:

It is quite simple to operate and understand as the relevant information is Job evaluation done on grading method makes wage and salary determination

provided by job analysis which serves other purposes too. easier as these are fixed in terms of various grades of jobs. Demerits This system of job evaluation suffers with the following limitations:

Job grade description is vague and personal biases may distort job grading as There are chances of employees' resistance when new clusters of jobs are

the method is not based on any scientific analysis. prepared. This is evident by the fad that government employees agitate when recommendations of a new pay commission come.

6.1.3.3 Point Method Point method of job evaluation is widely used in business organizations. It is an analytical and quantitative method which determines the relative worth of a job on the basis of points allotted to each specific factor of a job. The sum total to these points allotted to various job factors is the worth of the job. This total is compared with that of other jobs and relative worth of various jobs is determined. This process consists; Identifying the degree to which each compensable factor is present in the job
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Awarding points for each degree of each factor Calculating a total point value for the job by adding up the corresponding points for each factor

6.1.3.4 Factor Comparison Job Evaluation Method This method, also known as key job method, was originally developed at the Philadelphia Rapid Transit Company, USA by Eugene J.Benge in 1926 to overcome two major problems faced in point method of job evaluation and describing their degrees. In this method, each factor of a job is compared with the same factor of the other jobs or the key job either defined or existing one. When all factors are compared, the final rating is arrived at by adding the value received at each comparison. For this purpose, Benge identified five factors-mental effort, skill, physical effort, responsibility and working conditions. The procedure for factor comparison method of job evaluation is as follows: 1st step: Obtain job information 2nd step: Select key benchmark jobs 3rd step: Rank key jobs by factor 4th step: Distribute wage rates by factor 5th step: Rank key jobs according to wages assigned to each factor 6th step: Compare the two sets of rankings to screen out unusable key jobs 7th step: Construct the job- comparison scale 8th step: Use the job comparison scale Merits The factor comparison method is more systematic and analytical as compared to any other method and offers following merits:

It provides more accurate information about the relative worth of a job as Since only limited number of factors relevant for the effective job performance Since the evaluation is more systematic and analytical, its logic can be accepted

different comparable factors are compared with key jobs. are compared, there are reduced chances of overlapping. by trade unions and workers.

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Demerits However, factor rating method has its own opera4onal problems which restrict its adaptability. The major problems are as follows:

This method is quite costly and time consuming to install and difficult to If wage rates are adopted for making comparison, the system may become This system considers only limited factors of job for comparison. This may be a

understand by those not fully conversant with job evaluation process. obsolete very soon as there may not be proportionate increase in wages for all jobs. positive point so far as avoidance of duplication and simplicity of procedure are concerned, but may ignore other factors which may be important for the performance of the job.

6.2 External Competitiveness To achieve external alignment the management must first know what the average rates of its key job are prevailing in the community. Average rates may be decided when there is abundance of labour. when the enterprise is incurring losses. when the cost of living is going down.

when the enterprise has the reputation of being a stable employer with no

layoffs. when the enterprise pays sustained fringe benefits. when wages are linked to productivity which is constant or falling. But at ABC Travels Pvt. Ltd, though there is no abundance of suitable labour nor the organization is incurring losses etc, set the salaries

6.3 Performance based payment In the final step, management has to decide whether all individuals in jobs of the same level should be paid the same pay or different pay and how this should be determined. There are four

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basic approaches to the determination of individual pay: the single rate approach, the informal approach, the automatic approach, and the merit approach. 6.3.1 Approaches to the determination of individual pay 6.3.1.1 Single rates: When employee performance does not vary significantly on the job because everyone is required to work at about the same pace (e.g. in simple office jobs) single rates are frequently paid to employees on jobs. If there are any pay differences in such jobs employees may consider these as favouritism. 6.3.1.2 The informal approach: Sometimes individual pay decisions are made on an informal basis without formal guides or controls. This is most incorrect because this creates iniquities and confusion among employees regarding what is expected of them. Lack of company-wide standards may also result in pay decisions influenced by personal favouritism. 6.3.1.3 The automatic approach: Under this approach both the amount of the pay increase and the period of review are usually predetermined. In this approach since no consideration is shown to workers individual performance or merit he does not have enough incentive to put in greater effort. 6.3.1.4 Merit approach: If differences in individual performance and output are important to a company then some basis for compensating employees for these differences should be established. Merit rating is a management practice designed to gear the pay of employees to actual differences in work accomplishments. Merit rating systems assume that performance can be observed with reasonable accuracy even when it cannot be objectively measured.

6.3.2 Performance Appraisal and Role of Performance Appraisal in Performance based payment In the context of an industrial organization, performance appraisal is a systematic evaluation of personnel by supervisors or those familiar with their performance. In other words, performance appraisal is a systematic and objective way of judging the relative worth or ability of an employee in performing his/her task.
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Many authors described and some of them were tried to define the concept of performance appraisal in their own way. According to Gary Dessler, performance appraisal is an evaluation of employees current or past performance relative to his/her performance standards. Further he mentioned that the appraisal process involves three steps; a) Setting work standards, b) Assessing the employees actual performance relative to these standards, and c) Providing feedback to the employee with the aim of motivating that person to eliminate performance deficiencies or to continue to perform above par. McGregor discusses the formal performance appraisal plans in view of meeting three needs. Out of which one is relating to organization and other two for individual. The first one, organization level, is to provide systematic judgments to back up salary increases, transfers, demotions, or terminations. 6.3.3 Incentive Pay 6.3.3.1 What is Incentive Pay ? Incentives are pay for performance. Alternatively, incentives are called as variable pay or contingent pay. Dirideemana (pay for effort, allowance for encouraging improving job performance) is the Sinhala meaning for incentives. It link rewards cost and organizational performance. Employees are rewarded according to their job performance. Incentives are linked to individual job performance. Also they are linked to group or ream of performance. They can also be linked with organizational performance. The ultimate purpose of incentives is to improve performance ( Werther and Davis, 1989) Mathis and Jackson, ( 1988) defined Incentives as : An incentive is a special that drives an employee to perform beyond normal level of performance. It is an inducement that encourages the employee perform in better way. Incentives are rewards designed to encourage employee for efforts beyond normal performance expectations. Aswathappa ( 2007 ) defined Incentives as :

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Payments by results, incentives are paid in addition to wages and salaries and they depend on productivity, profit, or cost reduction efforts There is a clear distinction between incentives (variable pay) and base pay ( Wages and salaries ). Base pay is based on seniority or length of service. The philosophical foundation of base pay system rests on the following assumptions :
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Time spent each day is the primary measure of short term contribution. In the long term, length of service with the organization is the primary differentiating factor among people. Differences in individual contributions to the organization are recognized through different base pay levels. Giving additional performance rewards to some people but not others is divisive and hampers employees working together.

The philosophical foundation of incentive rewards system or variable pay system rests on the following assumptions: 1. Some jobs contribute more to organizational success than others. 2. Some people perform better than others. 3. Employees who perform better should receive more compensation. 4. A portion of some employees total compensation should be given to reward above satisfactory performance. Management of incentives can be defined as the process of development, implementation and maintenance of a fair and adequate system of incentives. All the activities involved in developing, implementing and maintaining a system of incentives that is appropriate from the perception of employees and employer as well. The system should be able to give a sufficient reward for employees efforts and it should also be able to increase overall organizational performance in the way that increases owners wealth.

6.3.3.2 Importance of Employee Incentives Plans

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The importance of Employee Incentive plan is defining by various experts in the field as follow: Snell and Bohlander ( 2008 ) Incentive rewards are based on entirely upon a pay for performance philosophy. Incentive pay programme establish threshold a baseline performance level that an employee or group of employees must reach in order to qualify for incentive payments. Armstrong and Murlis ( 2008 ) Variable pay has to be re earned. It is pay at risk which is awarded for specific achievements. The employee risks not being paid the bonus again unless the same, or a higher level of performance is achieved by reaching or exceeding new targets

Unlike normal pay increments and promotions, incentives do reinforcing performance quickly and frequently. Each time of paying incentives is generally associated with quick behaviors and gets incentives for them. Results are quick. Hence it is more likely that the employee tends to continue putting efforts or engaging in specific behaviors. 6.3.3.3 Advantages of Incentives Programmes Incentives focus employee efforts on specific performance targets. They provide real motivation that produces important employee and organizational gains. Incentives payouts are variable costs linked to the achievement of results. Base salaries are fixed costs largely unrelated to output. Incentives compensation is directly related to operating performance. If performance objectives ( quantity or quality) are met, incentives are paid. If objectives are not achieved, incentives are withheld. Incentives foster teamwork and unit cohesiveness when payments to individuals are based on team results. Incentives are a way to distribute success among those responsible for producing that success.
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Incentives are a means to reward or attract top performances when salary budgets are low.

6.3.3.4 Types of Incentives Organization may offer different types of incentives plans to motivate employees to perform to their possible extent. These incentive plans can be grouped in to three broad categories : Individual Incentive Plans According to the Individual Incentive plan, focuses individual job performance and them incentives are paid individually. Some plans include piecework, sales performance, bonuses, merit pay, lump sum merit pay, incentive awards, attendance bonuses etc..They attempts to admire employees individually. They will increase a competition among the employees being concerned. Employees who produce higher outcomes will be able to get higher variable pay. Employees who produce lower outcomes will have to get lower variable pay. Employees who do not meet the performance threshold ( the minimum level of performance that makes the employee qualify for incentive payments ) will not be able to receive any variable pay. It may develop hostile atmosphere among the employees. Some may be jealous over others. Team performance or team work is discouraged. Piecework This is the oldest incentive plane. There are two types of Piecework: Straight Piecework The employee is paid a sum for each unit produced by him or her. Earnings paid to the employee are in direct proportion to the work done by that employee. Differential Piecework Employee is paid a piece rate for each of the units up to a standard output and a higher piece rate for each of the units produced over he standard. The amount of piece rate may e based o data collected through pay surveys. Standard hour plan
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Under this incentive plan, employee is paid an incentive if he or she completes a work or job in less than the standard time. A standard time is fixed for completing job. If the employee completes the job in less than the standard time, his or her pay is still based on the standard time for the job multiplied by his or her hourly rate. This plan is more appropriate for service organizations such as vehicle repairing or servicing. When the job or work is non repetive , has a long job cycle and requires a variety of skills, this plan is appropriate. However, while standard hour plans can motivate employees to produce more, employers must ensure that equipment maintenance and product quality do not suffer as employees strive to do their work faster to earn additional income. Bonuses This is a one time payment, usually per year to the employee. It is not a part of the base pay. It is an additional income to the employee. The employee has the advantage of getting an additional payment for exerting greater effort to increase performance while having the security of basic salary or wage. Bonus payments are common among managerial and executive employees, but recent trends show that they are increasingly given to employees throughout the organization. Merit pay Merit pay is alternatively called merit raise. Which is a pay increase awarded to an employee based on his or her individual job performance. Individual job performance is measured through a performance evaluation system and depending on the level of the performance merit pay is given to the relevant employee. Unlike bonus, merit pay usually becomes part of the employees base pay. Lump sum merit pay Under this, a single lump sum merit pay is given to the employee at the time of job performance review and this pay is not added to his or her base pay. Unlike merit pay that is cumulative, lump sum merit pay is not cumulative. It is paid only for the period concerned and it has to be re earned. Lump sum merit plan freezes base salaries or wages resulting in controlling cost of base pay. Nonmonetary incentives
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Always we tend to think that incentives as often mean money. But there are nonmonetary incentives in forms of incentive awards and recognition awards. Incentive awards include gift certificate, time off, vacation, theatre and film tickets, personalized clothing, merchandise awards, novelty items, travel awards, and other non cash incentives. Recognition awards include plaques, employee of the month, employee of the year, service excellence trophy and other meaningful recognition. It is important to mention here that these awards should be given to appreciate and recognize actual job performance which is excellent. Sales incentives Sales incentives are differ from other employees in the sense that they bring the business profits directly by selling goods or services to customers who are consumers and buyers who have the intention of re selling. Organization pay a special attention to sales incentives. Due to increase competition, very high level of motivation is expected form sales employees.

Team Incentive Plans It focuses on group job performance and then incentives are paid collectively. Some plans include team rewards, scanlon plan, rucher plan, improshare etc They attempts to induce employees collectivity. They will not increase a competition among the employees being concerned. However they will increase a competition among different teams. When an entire group is paid with incentives (generally every group member gets an equal amount ) all members of the group will have to work cooperatively. Hence, the result is most likely cooperation amount the members. Each group has to meet the performance threshold and groups, which do not meet the performance threshold , will not be able to receive any variable pay. When there are employees who prefer working individually to working collectively team incentive plans may not be successful. Team Incentive Plan

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Under this, gives an incentive bonus to all team members when certain production or service standard are met. The incentive plan attempts to establish a psychological climate that fosters team cooperation among all the members of the group. Scanlon Plan This is a gainsharing plan based on a philosophy that employees are capable making suggestion, have willingness to give suggestions and share improvements which derive from application of suggestions. It aims at reducing costs and then sharing in the savings. Rucker Plan This is a gainsharing plan based on a philosophy that employees are motivated by economic incentives. Also it has some reliance on employee participation. It is alternatively called the share of production plan. The plan usually covers production workers but may be expanded to cover all employees. It expects suggestions from hourly employees, has a steering committee comprised of hourly employees, union representative and key managers and has one manager acting as the idea coordinator for processing all suggestions. Improshare This refers to improved productivity through sharing. This is another group incentive plan which bonuses are based on the overall productivity of the work team. The plan is based on a philosophy that group economic incentives increase performance. It has no suggestion making and therefore there is no attempt at meaningful employee participation. It ties economic rewards to performance. The bonus is based on productivity gains that result from reducing the time it takes to produce a finished product. Organizational Incentive Plans This focuses on entire organization performance and then incentives are paid organizationally. Some plans include profit sharing, stock option, employee stock ownership plans etc.. They attempts to induce employees generally as a whole. They will reduce competition among the employees and the groups and require that all employees work together to generate better
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organizational outcomes which can lead to better financial performance. These programmes share some of the financial gains to the firm through payments to employees. As an additional percentage of base pay relating to each employee, incentives are paid from the organizational financial gains. An equal amount may be paid to each employee of the organization or different amount may be paid depending on rank or level of the employee in the organizational hierarchy. Overall business performance is encouraged. Profit sharing Profit sharing is an organizational incentive plan that shares profits with all the employees of the organization. It distributes a portion of organizational profits to employees. The employees will have the opportunity to increase their earnings by contributing to the growth of their organizations profits. Contributions to growing the organizational are owing to increase quantity of production and selling, improving quality of the products, decreasing total costs, introducing new methods to increase efficiency, minimizing accidents and health problems, minimizing wastage and enhancing goodwill of the organization. Due to profit sharing, employees think and feel that they also partners of the organization. Stock options Stock options are a way of achieving employee ownership. It is as an employee ownership plan that gives employees the opportunity to but the companys stock at a previously fixed price. It makes employees to become owners who get dividends. They will encourage employees to focus on the success of the organization. It is hoped that they become motivated and loyal to the organization and then work to improve overall performance of the organization. The use of stock options, as well as salaried and executive personnel, and this appears true regardless of the industry surveyed or the organizations size. It is hoped that employees will work hard and smart to cause the stock price to rise. Employee stock ownership plan Employee ownership plan gives employees certain tax and financial advantages when stock is granted to employees. A corporation contributes shares of its own stock to a trust is which additional contributions are made annually and the trust distributes the
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stock to employees on retirement or separation from service. According to this, a company makes tax deductible contribution of stock or cash to a trust fund to by stock which in then allocated to the employees who acquire and increasing right to stock as they gain seniority at the time of retirement or resignation, a employee receive their stock.

6.3.3.5 Requirements of a successful Incentive Plan Clear Purpose or Purposes Wide Coverage Fair and Consistent Means of Measuring Performance Simplicity Proper Linkage No upper Limit Definiteness Recognition of Individual Difference in terms of Performance Guarantee of Minimum Payment Separate Identification Adequacy Targets of Average Difficulty Follow up Use of the Incentive Plan as part of a Broader HRM system

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7. Practical application of compensation management Compensation management practice at ABC Travels Pvt. Ltd
To gather information on compensation management of ABC Travels Pvt. Ltd, following questions were asked from Mr.Chameera Botheju, The Human Resource Manager of ABC Travels Pvt. Ltd. Q 1: What is the Reward/ Compensation strategy of your organization? A: We dont a specific written strategy. But our goal is to attract, motivate and reward high performers who produce high-quality, innovative and professional work. To achieve these goals, we have developed compensation packages to each employee based on their contribution, level and complexity of duties and responsibilities. Critique: To achieve goals of an organization successfully, every HR practice should align with business strategy. To be successful in compensation management they have to have clearly defined goals and a well-defined link to business objectives. Then based on that, it is
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required to develop HR strategy and then based on the HR strategy to develop and justify Reward Strategy and define guideline principles.

Q 2: Who is responsible for setting the total compensation packages? A: In general, The General Manager set the proposal and sends it to the Managing Director through Human Resource Manager for MDs approval.

Q 3: Do you consider market reward levels when you set these packages and/or do you conduct Salary survey to identify other competitors salary levels? If yes, how do you conduct salary survey? If not, why dont you do that? A: Yes we consider, but we do not conduct any market salary surveys. We gather required information through employees informally. When we set the compensation packages, there are already set compensation packages at each level but we consider the qualifications of the candidate and his/ her expected salary level etc. (negotiable) and then set his/her package while making sure that its aligned with the compensation packages of existing staff such as their salaries according to the level and complexity of duties and responsibilities etc. Critique: To achieve external alignment the management must first know what the average rates of its key job are prevailing in the community. There are formal and informal ways of gathering required data which includes Surveys made by governments, trade and professional associations, consultants, voluntary associations of employers, and individual employers. The Internet is another good source of information on salary surveys but we must ensure that source is reliable, and it is a must that we carefully analyze those information. It is good that they are considering market reward levels. Though they do not conduct any market salary survey or do not hire any consultancy company, they informally gather information through employees. But, level of reliability of information gathered through employees is questionable.

Q 4: Do you think your employees getting a fair salary compared with other companies?

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A: When we set the compensation packages we make sure that they are receiving a reasonable amount for the job and it is a fair amount when compared with compensations of similar jobs in other organizations. Critique: External equity exists when an employer pays a wage rate commensurate with the wages prevailing in external labor markets. Assessing external equity requires measuring these labor markets. There is, however, no single labor market for a particular job. Supply and demand differ substantially among markets, resulting in significant variation in wages across labor markets depending on factors like Geographic location, Industry sector, Union status, Organization size, Product competition, Company prestige, Education and experience level of available work force, Licensing or certification requirements called for by the job etc. Some combinations of these factors determine the labor market for a particular job. They claim that they make sure that their compensation packages are reasonable compared with other similar jobs in other organizations, thus, good, they ensure that the external equity it there.

Q 5: Do you think that achieve external competitiveness through compensation? A: Though we are a reputed, well established organization, we do not lead the market. We follow the salaries of other competitive organizations like Walkers Tours, Aitken Spence Travels etc. When we set the packages, we always set them at the industry average level. Critique: That means it is not their strategy to attract or retain good employees through external competitiveness. It was obvious that the company is experiencing a high labor turnover. The high performers are attracted by other competitive organizations for higher compensation packages or they find jobs in abroad for higher compensation packages. Most of the time, the employee leaves the company with his client base and it is a cost to recruit, select and train a new employee to replace him.

Q 6: When you set a compensation package, do you consider relative internal value of the job to make sure that your employee is getting a fair salary compared with others in the same company?

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A: As I said earlier, when we set the compensation packages, we consider the qualifications of the candidate and his/ her expected salary level etc. it is negotiable but we always make sure that its aligned with existing compensation package levels. It is also possible two people working in the same job position may be getting two different salaries but within a range for that job position. Critique: Question was raised to see whether they are considering internal equity. Internal equity exists when an employer pays wages commensurate with the relative internal value of each job. This is established according to the employer's perception of the importance of the work performed At ABC Travels Pvt. Ltd., Compensation packages are designed ensuring that its aligned with existing compensation package levels. I.e. they are aligned with the existing staff compensation package levels and complexity of duties and responsibilities etc. i.e. relative internal value of each job is considered i.e. a good practice, which is internal equity, exists. Q 7: Do you evaluate the relative importance of each job when designing a compensation package based on a job evaluation i.e. factors like Education required, Experience required, Physical demands, Responsibility for equipment/materials, Supervisory/managerial responsibility, Working conditions etc,? A: Yes of course, originally we have done job evaluations, and we have job descriptions and specifications developed based on that. When we recruit and select a new employee, we consider job specifications and job description and they are communicated to the new member when he is appointed. All the basic compensation packages have been developed based on its relative importance. Critique: "Job evaluation is a process of determining the relative worth of the various jobs within the organisation. so that differential wages may be paid to jobs of different worth. The relative worth of a job means relative value produced. The variables which are assumed to be related to value produced are such factors as responsibilities, skills, efforts and working conditions". Job evaluation helps in fitting new jobs at their appropriate plane in the existing wage structure, improves labour- management relations by reducing grievances, establishes on
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objective and clear basis for wage bargaining and simplifies wages administration. Thus, it is good that they are using job descriptions to see the relative importance of each job when designing compensation packages.

Q 8: Are employees reward connected with competence? If so how? A: Yes, during the process of performance appraisal, each employee gives a self rating about existence of each competency, identified and listed in the appraisal form for the purpose. In the same form, the immediate supervisor (manager) also gives a rating to existence of each competency of his subordinate. This information is also taken in to consideration for the final recommendation of reward/ incentive.

Q 9: How often do you conduct employee performance evaluations? and is Reward connected with performance? A: Performance evaluation is an on-going activity with the individual as the focus. The immediate supervisor continuously evaluates employee job performance. Through regular interaction between employee and his manager and the continuous feedback, try to give a sense of how the manager perceives employee performance. However, to avoid haphazard or incomplete evaluation, we conduct formal reviews and appraisals annually. Performance reviews are normally conducted twice a year an informal appraisal in September and annual appraisal in March. A review may also be conducted in the event of a promotion or change in role and responsibilities. The outcome of these reviews will be used for the annual appraisal, which will be conducted in January every year. Compensation review is also done annually along with the Performance Appraisal once a year. We believe that it is the employee who is a key player during the review. Hence, it is the employee who initiates the process by doing the self-assessment and indicating his development plan for the next year . Based on the inputs received, the line manager conducts the review .

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Yes. We have direct link between performance appraisal and compensation. A final recommendation of reward/ incentive will be given based on the findings of the Performance Review . Critique: In the context of an industrial organization, performance appraisal is a systematic evaluation of personnel by supervisors or those familiar with their performance. In other words, performance appraisal is a systematic and objective way of judging the relative worth or ability of an employee in performing his/her task. Many authors described and some of them were tried to define the concept of performance appraisal in their own way. According to Gary Dessler, performance appraisal is an evaluation of employees current or past performance relative to his/her performance standards.

McGregor discusses the formal performance appraisal plans in view of meeting three needs. Out of which one is relating to organization and other two for individual. The first one, organization level, is to provide systematic judgments to back up salary increases, transfers, demotions, or terminations. When an employer compensates individuals who are in similar jobs on the basis of variations in individual performance -so-called pay for performance, Individual equity exists. Excellent performers, for example, would receive more compensation than average performers. For reasons that will be explored in greater detail later, the most important compensation decisions are those that differentiate between the pay received by individuals within the company who are performing the same job. Since ABC Travels Pvt. Ltd. Has directly linked compensation with performance appraisal, it is proved that the compensation management practice of ABC Travels Pvt. Ltd ensures individual equity as well.

Q 10: Are your staff well communicated the compensation policies about the percentage of increment for the different levels of performance? A: We always communicate that the benefits such as performance excellence rewards or salary increments will be based on performance appraisal. By experience they know that it is in regular practice. But we dont have a clear policy to tell that this level performance deserve this much increment etc. That decision is solely left up to the higher management.
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Critique: Transparency- the publication of information on reward structures and processes to employees has to be there to achieve expected benefits of compensation management system. Such a system should be well defined and uniform. It will be apply to all the levels of the organization as a general system. And also the system should be simple and flexible so that every employee would be able to compute his own compensation receivable. Here at ABC Travels Pvt. Ltd, that practice or Transparency is not there. The employee knows that he performed well and an increment will be given, but he dont have a clear idea about what is the likely increase for this year? This affect on employee motivation factor as well as may arise conflicts/ disagreements between management and employees etc.

Conclusion
ABC Travels Pvt. Ltd has a good compensation management system. They are successful at achieving equal pay. They ensure that all internal, external and individual equity is achieved but the relative importance attached to external competitiveness is low which leads them to lose high performing employees as they leave the company for higher packages, most of the time with their client base!. ABC Travels Pvt. Ltd clearly says the compensation is linked with performance; these are the packages etc. but dont have a specific written reward strategy. The transparency- the publication of information on reward structures and processes to employees is also not there since the final decision on compensation is taken by the higher management and since there is no written, well defined, uniform, simple and flexible system so that every employee would be able to compute his own compensation receivable.

Recommendations
It is recommended; to have a well defined reward strategy developed based on the business strategy and the HR strategy, to communicate it to the employees to ensure transparency thus to minimize misunderstandings and possible conflicts,
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to attach higher relative importance to external competitiveness so as to attract and retain high performers and to minimize possible unnecessary cost on recruitment, selection and training etc of replacements,

to have more methods to gather information on market compensation package levels (conduct salary survey, service of such a company or gather published data) other than the only method currently following, gathering information through employees informally.

to continue the well designed performance based and competency based compensation management systems (see all the annexure) which ensure individual equity and line manager involvement. References Armstrong, M (2009), Armstrongss Handbook of human Resource Practice, 11th ed, Kogan Page, London and Philadelphia Brown, D and Armstrong, M (1999), Paying for contribution, Kogan Page, London http://www.citeman.com/13742-wage-and-salary-surveys.html http://www.eridlc.com/index.cfm?fuseaction=textbook.chpt08 http://www.hr.vt.edu/compensation/compmgt/comp_offers/index.html http://payroll.naukrihub.com/compensation/ http://www.slideshare.net/sushisonai/homepeerlessdesktop-compensation-management1

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Postgraduate Diploma in Tourism Economics and Hospitality Management

Subject: Human Resource Management Assignment 01

Compensation management practice at ABC Travels Pvt. Ltd

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