MU0015 - COMPENSATION AND BENEFITS

Q1. Explain compensation as a retention strategy. Describe the significant

compensation issues
Ans:

Compensation as Retention Strategy: Compensation system plays an integral role in

retention of employees as a poor compensation is indeed one of the strong factors of
employees leaving the organisation. A compensation system in an organisation can be linked
to employees behaviour and attitude. An ineffective compensation strategy can result in poor
job satisfaction and organisational identification which may further affect employee
behaviour towards each other and the organisation. As represented in table 1.3, ten
studies conducted in past show that poor compensation stands as one of the major
reasons for a higher employee turnover.

A retention strategy, in addition to providing support to companys vision and values, must
also support compensation and benefit package. The firm must design the overall
compensation policies and strategies. Thus, in order to retain a right kind of workforce,

organisation must follow the steps given below to design an effective compensation
strategy from top to bottom.

MU0015 - COMPENSATION AND BENEFITS

Significant Compensation Issues: Just as HR activities strive in a dynamic environment,

compensation management also operates in this environment. When managers aim to reward
their employees in a fair manner they must also take into consideration certain critical issues
like labour cost control, legal issues relating to male and female wage payments and concerns
relating internal pay equity. Therefore, you can say that the major or significant issues
relating to compensation in an organisation are:
Equal pay for comparable worth: This issue has risen from the fact that the jobs which are
performed by women employee are less paid in comparison to the jobs which are performed
by men. Such a practice in criticism is termed as institutionalised Sex discrimination.
Low salary budgets: You can simply say that while current inflation trends have been stable
making employees realise the real worth of their gain in earnings which seems to be quite
smaller in comparison to earlier years. The tight compensation cost control resulted from
global job competition, reduction in use of manpower due to introduction of new technology
and increasing utilisation of part-time and temporary workers receiving lower wages and
benefits have all resulted in low salary budgets of the company.
Wage Rate Compression: The issue of low salary budget as discussed above can be rooted to
the compensation problem known as pay compression. A compression in wage rate takes place
when less experienced junior employees earn comparatively more than the employees who
are experienced. This can be attributed to the sole reason that such inexperienced employees
are paid more due to higher starting salaries.

Q2: Explain the steps involved in designing a salary structure. List the components of
pay structure.
Ans:
Designing a salary structure: One of the critical areas in Human Resource Management is
compensation which may affect the behaviour of the employee. The HR professional may
design a sound salary structure for their employees. The simplest way to design the salary
structure is as follows:
Step 1: Job analysis : It is a method of studying and identifying various jobs in the
organisation which result in description of job. The contents are as follows:
1. a summary of the job tasks
2. a description of the work context

MU0015 - COMPENSATION AND BENEFITS

3. job title
4. abilities, knowledge, skills needed to perform the job
5. a list of the essential responsibilities and tasks
Step 2: Job evaluation : It is a procedure of analysing the relative worth of the jobs in an
organisation which may result in the hierarchical ranking or development of an internal
structure of jobs. It helps to make sure that pay is perceived to be fair and internally aligned
by the employees. You can note that there are three methods of job-based evaluation which
are as follows:
1. Ranking method
2. Classification method
3. Point method
Step 3: Pay policy identification: The identification of the pay policy examines whether the
organisation wants to meet, lead or lag the market in the compensation structure or not. This
pay strategy or policy will help the organisations in attracting new employees and retaining
its existing employees. The variations in pay structure can be seen across job levels and job
families (i.e., groups of similar jobs). These variations are caused by the higher authorities as
they think that the several strategies or policies can be useful at various levels of the
organisations.
Step 4: Pay survey analysis: In this, the compensation data is collected and gathered from
various employers of the relevant labour market in a survey. Then, data analysis is conducted.
Collection of external pay structure such as bonuses, benefits, stock options and base pay is
important to make the compensation structure of the organisation externally competitive
within its industry. Improvement in employee attraction and retention can be maintained by
aligning the external structures of pay.
Step 5: Pay structure creation: The last step in designing a sound pay structure is its
creation in which the internal pay structure which you have seen in Step 2 is combined with
the external market pay rates which you have seen in Step 4 in order to build a market pay
line. The market pay line can be adjusted up or down depending upon whether the
organisation wants to meet, lead or lag the market.
Components of pay structure: The three basic components of pay structure are as follows:
1. Basic wage: It is a pay which could be given on weekly, daily or monthly basis at a given
level of output for a normal rate. It is a price which is paid to get a particular job done.
2. Dearness allowance (DA): This allowance is given to the wage earners so as to give
assistance to them in the inflationary situations by giving an additional allowance to offset
the cost of living.
3. Profit sharing bonus: In payment of bonus, an employee willingly looks forward to an
annual issue. In India every year, the payment of annual bonus is a constant source of friction.
The other components of pay packet are as follows:
a. Medical benefits
b. Provident fund
c. Leave travel concession

MU0015 - COMPENSATION AND BENEFITS

d. ESIS
e. Educational allowances for children etc.
f. Compensatory city allowance
g. Group-linked insurance scheme
h. Leave with pay
i. House rent allowance

Q3. Define the term wage. Write a brief note on wage policy.
Ans:

Wage Concept: Wages in its broadest sense implies any kind of economic compensation
received by the employee from the employer under the contract of employment whereby the
employee renders some services to the employer.
The term wage is used to define different concepts like wage rate, gross average hourly
earnings, straight time average hourly earnings, weekly earnings, weekly take home pay,
annual earnings, etc.

Wage Policy
Wage policy can be defined as the principles which act as guidelines for determination of a
wage structure. It relates to all systematic efforts of the Government in relation to a national
wage and structure of wages.
The wage policy in India is built around the following fundamental principles:
1. Equal compensation for an equal work performed
2. Providing living wages for employees
3. Payment of wages without any deduction on the appointed dates
4. Use of collective bargaining to resolve wage related issues
5. As per legal provisions paying 8.33% as statutory bonus
6. Determination of fair wages above minimum wages in respect to labour productivity,
prevailing wage levels, national income and its distribution and place of industry in the
financial system
Wage policy in India: The plans of wages in India are explained as follows:
The first plan (1951 to 1956) suggested that pre-war levels of real wages should be

restored as an initial march towards living wage by use of enhanced productivity. It further
suggested various measures for making wage adjustments like reduction of disparities in
income, reduction of gap between the current and living wages, maintenance and
standardisation of wage differentials to provide incentives.
The second plan (1956 to 1961) stressed improvement in wages through increased

productivity stemming from efficiency on the part of the workers, improved layout of plants
and improvement in management practices.

The third plan (1961 to 1966) reinforced the wage policy of the preceding two plans with

respect to minimum wage fixation, reduction of disparities and wage differentials and
stressed the role of productivity in raising the living standard of the workers.

MU0015 - COMPENSATION AND BENEFITS

The fourth plan (1969 to 1974) did not provide a fresh direction or any shift of the

Governments wage policy.

The fifth plan (1974 to 1979) recommended that the reward structure of the industrial

employees in terms of wage and non-wage benefits must be related to performance records in
industrial enterprises. It was necessary to build over a period of time a national wage
structure to narrow down disparities within the organised sector itself, including both public
and private sectors.
The sixth plan (1980 to 1985) pointed out that there were clear variations with respect to

wages between the organised, unorganised, and urban and rural sectors. The differences and
inequalities have resulted in social tensions and industrial unrest.

Therefore, the plan stressed the need for bringing about a larger support of wage structure
and connection of pay at least in some measure to labour productivity.
The seventh plan (1985 to 1990) claimed that an important aspect of labour policy is

related to the formulation of an appropriate wage policy. The basic aim of the wage policy
was a rise in the levels of real income in union with increases in productivity, promotion and
productive employment improvement in skills, sectoral shifts in the desired directions and
reduction in disparities.

The eighth plan (1992 to 1997) laid focus on formulation of wage policy involving child

labour, rural and bonded labour, women labour and inter-state migrant labour, etc.

Q4: Explain the concept of tax planning with an example. Explain its role in
Compensation Benefits.
Ans:

Concept of Tax Planning: Tax planning is an analysis done for the reduction of tax liabilities
that enables employers and employees to evaluate their financial profile. The objective of
tax planning is tax minimization on their personal income or business profits.
Tax planning exercise involves three basic phases:
1. Computation of total taxable income under different heads like earnings from salary,
capital gains and house property, etc.
2. Computation of tax to be paid on gross taxable income in a financial year.
3. Making a choice among the two options given below to calculate the tax liability.
(a) Pay your tax
(b) Minimise the tax liability using tax planning
Therefore, tax planning entails the structuring of salary, timing of income and purchase plans,
selection of best investment plan, the process and outlays in tax filing, etc.

Role of Tax Planning in Compensation Benefits

Tax Planning is all about putting the hard earned money to good use instead of giving
it all to the government. It doesn't mean not paying the taxes, it just means being
smart about placing the money to acquire maximum benefits to the employee and his future
livelihood.

MU0015 - COMPENSATION AND BENEFITS

An employer, has to pay even more attention to tax planning with the below points being
included in the planning.
Entity Structure Planning: The optimal entity structure for the business should be created

and the tax benefits and legal asset protection benefits should be personally maximized.

Compensation and Benefit Planning: Strategies should be developed that meet the

personal and business short and long goals and objectives. Its really about minimizing taxes
and out of pocket expenses paid with after tax rupees. The goal is to maximize the income
and the amount available to the business by minimizing the taxes across the board.

Maximize Advanced Retirement Planning and Income Deferral Opportunities: Employers

must annually capitalize on techniques to maximize money and continued income streams
available for life after the business.

Utilize Succession, Exit Strategy, and Estate Planning Opportunities: When the employer

exits a business, it will be a taxable event. A plan should be developed to minimize taxes on
the transfer to ensure maximum amount of take away money.

Avoid or Eliminate Questionable or "Grey Area" Tax Planning Strategies to reduce Audit

Risk: All the tax planning strategies should be supported by the black and white language of
the IRS Tax Code and Regulations. For the informed employer many opportunities exist.

Q5: Define reward management. What are its aims? Explain the factors affecting
reward management policies in service sector
Ans:

Concept of Reward Management: Reward Management basically refers to the

implementation, evaluation and formulation of processes, policies and strategies which are
needed so as to ensure that the peoples contribution towards the form is recognised by both
the monetary as well as non monetary means. The basic purpose of Reward Management is
to reward the employees equitably, consistently and fairly with respect with their value to
the firm and also to help the firm to achieve is overall strategic objectives.
Aims of reward management: The basic objectives of the Reward Management are as
follows:
1. It helps in winning the war for talent by attracting and retaining the highly qualified and
talented employees.
2. It helps in developing and building the positive relationship as well as the psychological
contract.
3. It helps in motivating the employees and obtaining their commitment and engagement.
4. It helps in developing a high performance culture in the organisation.
5. It helps in aligning the reward practices with the organisations objectives as well as with
the employees needs and values.

Factors Affecting Reward Management Policies in Service Sector

1. Internal environment: It consists of culture of firm providing services, its businesses,
technology and the people.

MU0015 - COMPENSATION AND BENEFITS

2. External environment: It includes the competitive pressures existing in service industry,

globalisation, changes in employment and demographics etc

3. Strategic reward management: It is an aspect of strategic management whose

purpose is to elicit the current actions for future and become a vehicle for action to
institutionalise and integrate mechanisms for change. The service sector reward
strategy has arisen with time and can be regarded as a pattern in steam of activities.
4.Total reward: Total reward policies provide a holistic view to be adopted in reward
management for businesses engaged in service sector to ensure that all aspects of rewards
are treated as coherent portfolio of practices and policies.
5. Human capital management (HCM): It is associated with procuring, analysing and
reporting on data which provides information on the direction of value-adding people
management strategies, investments and operational decisions taken at front-line
management or at corporate level. HCM approach to reward management attempts to access
the impact of policies of remuneration on people and businesses.
6. Motivation: Motivational theories also act as an important guide for use of contingent pay
and the non-monetary elements in total reward system thus influencing the reward strategies
and management of service sector firms.
7. Engagement and commitment: Job engagement and organisational commitment are one
of the key guiding concepts that guide the total reward policies and variable pay in service
sector industries.
8. Psychological contact: An understanding of psychological contracts and its significance at
the time of formulating and implementing reward policies is important influential factor
affecting service sector reward policies management.
9. Approach towards new/dynamic pay: New pay refers to identification of pay practices
that aim at enhancing the organisations strategic effectiveness. The concept of dynamic pay
suggests that nine following principles support a successful pay strategy which can be utilised
in designing an effective reward strategy for service sector firms:
1.
2.
3.
4.
5.

Alignment of compensation with fair value, culture and business objectives.

Linking compensation and other changes
Integration of people processes and pay
Result measurement
Be selective in designing pay strategy

Q6: Who are Expatriates? What are the objectives of Expatriate compensation?
Differentiate between Financial (extrinsic) compensation and Non-financial (intrinsic)
compensation.
Ans: Expatriates: Expatriates are employees who move from one country to another for
employment and are assigned long-term assignments ranging for a period of more than one
year

MU0015 - COMPENSATION AND BENEFITS

Objectives from point of view of organization

Compensation for Expatriates enables the firms:
1. to control the cost relating to expatriate compensation
2. to attract potential job applicants interested in international assignments
3. to facilitate expatriate movement from one auxiliary unit to other, from home to
auxiliary or auxiliary to back home
4. to be internally equitable and externally competitive for retaining suitable qualified
personnel
5. to stimulate employees through rewarding performance resulting in organisational
success
6. to achieve employee satisfaction regarding the compensation earned
7. to provide job satisfaction to its employees placed abroad
8. to motivate them to successfully complete their assignments
9. optimize its total wage level
10. to give due consideration to equity and easy administration
11. institute and sustain an unswerving and rational relationship between compensation of
all of the employees
12. arrange realistic compensation for various locations, in comparison to leading
competitors compensation for reasonable foreign services, tax equalisation,
reimbursement of reasonable cost
Objectives from the point of view of expatriate employees
Compensation for expatriates enables them to:
1. feel secured that their compensation policy offers them financial guard in provisions of
cost of living, social security and other benefits
2. expect that foreign assignments are offering them opportunities for financial
advancement through earnings and savings
3. ensuring that concerns like children education, housing and recreation are correctly
addressed in the compensation policy
4. to feel satisfied regarding career advancement and repatriation