Compensation

Compensation can be defined as the adequate and equitable remuneration of personnel for their
contributions to the organizational objectives.
According to Benham Compensation is the value of work of the employees according to the
agreement between employer and employee.
Compensation refers to all forms of pay or rewards going to employees and arising from their
employment. It has two main components:
Direct financial payments consisting of pay received in the form of wages, salaries,
incentives, dearness allowance, cash allowance, commissions, bonuses, commission,
profit sharing stock option etc. provided at regular and consistent intervals.
Indirect payments including all financial rewards that are not included in direct
compensation and understood to form part of the social contract between the employer and
employee such as , legal requirement, provident fund, gravidity, pension, insurance,
medical leave, accident benefits, maturity leave, optional sick leave, casual leave, travelling
allowance, telephone bills, canteen allowance, club membership etc.

Objectives of Compensation

- To achieve internal and external equity. The main objective of compensation function is to create
a system of rewards that is equitable to the employer and employee alike.
- To motivate the employees towards increasing productivity.
- To recruit and retain qualified employees.
- To increase or maintain morale/satisfaction.
- To reward and encourage peak performance.
- To reduce turnover and encourage company loyalty.
- To modify (through negotiations) practices of unions.
- To enhance general goodwill of the company.

Components of compensation

1. Basic salary: A basic salary this is regarded as a fixed element of pay and it does not
normally vary in relation to company performance.
2. Allowance: Allowance such as house rent allowance, utility allowance, telephone bill
allowance, convenience allowance, servant allowance, entertainment allowance, travelling
allowance etc.
3. Bonus: A bonus is an additional compensation given to an employee above his/her normal
wage. A bonus can be used as a reward for achieving specific goals set by the company, or
for dedication to the company.
Festival Bonus: All employees get festival bonus during their festival time.
Production Bonus: Employees get production bonus after fulfilling their production
target.
Incentive Bonus: An employee can get incentive bonus for his outstanding
performance.
4. Benefits: Benefits are generally provided as security such as health coverage, full medical
coverage, pension, gratuity etc.

Components of international compensation package

Key components of an International compensation program are

Base salary, foreign-service inducement/hardship premium, allowances and benefits
1. Base salary
- Denotes the amount of cash compensation serving as a benchmark for other compensation
elements
- Base salary may be paid in home or local currency or in some hard currency like pound or dollar.
 2. Foreign Service inducement/hardship premium:
A salary premium paid to an inducement to accept a foreign assignment or as compensation for any
hardship caused by the transfer. Such payments vary depending upon the assignment, actual
hardship, tax paid to foreign governments and length of the assignment.

3. Allowances: Various allowances are paid to expatriates depending upon the assignment.
They include:

a) The cost-of-living allowance (COLA): It involves a payment to compensate the differences in

expenditures between the home country and the foreign country.
b) Housing allowance: Implies that employees should be entitled to maintain their home-country
living standards (or, in some cases, receive accommodations)
c) Home leaves and travel allowances: Is given to cover the expense of trips (usually once in a
year) back home. These trips allow the expatriates the opportunity to renew family and
business ties, thereby helping them to avoid adjustment problems when they are repatriated.
d) Education Allowances for Children: Education allowances are given t for the education of
expatriates children. Education allowances include items such as tuition, language class
tuition, books, transportation and uniforms.
e) Relocation Allowances and Moving: Relocation allowances usually cover moving, shipping;
temporary living expenses, and down payments or lease-related charges.

Factors determining compensation

Position and Seniority: Compensation depends on job classification/rating/pay grade. Most
organizations set salary ranges for the positions they seek to fill. These ranges basically define the
pay scale that comes with any given position to be filled.
Similarly, if the position calls for someone with 10 years of experience in a particular occupation,
results in higher pay.
Skill/ Knowledge: Most jobs come with baseline knowledge and skills requirements, but those who
exceed them can expect to be compensated more than those who dont
Location: Certain areas, where the cost of living is high, have historically paid higher wages.
Government rules and regulation: Government has also fixed the rules for protecting the interest of
the employees. The organizations are liable to pay as per the government instructions. Wages cannot
be fixed below the level prescribed by the government.
Inflation rate: During inflations compensation will be higher.
Financial condition of the firm: It depends upon the employers ability to pay wages to the workers.
This depends upon the profitability of the firm. The big companies can pay higher compensation as
compared to the competing firms whereas the smaller companies can afford to maintain their pay
scale up to the level of competing firm or sometimes even below the industry standards.
Cost of living: The cost of living index also influences the employee compensation, in a way, that
with the increase or fall in the general price level and the consumer price index, the wage or salary is
to be varied accordingly.
Demand and supply of labor: It is one of the important factors affecting wages. If the demand of
labor is more they will be paid high wages otherwise vice versa. If the supply of the employees is
more than they will be paid less and vice versa.
Labor union: labor union also helps in paying better wages to the workers. Higher wages have to be
paid by the firm to its workers under the pressure of the trade unions.
Productivity of workers: To get the best results from the employees and to increase the productivity
compensation sometimes has to be productivity based.
 Method of determining major compensation:

1. Time-Based Compensation:
- Under this method, employees are paid for the amount of time they spend at work.
- Some organizations offer to pay their employees as per hours. Means the compensation plan is
based on per hour working.
- The organizations set the amount of money to pay per hour.
- The usual form of time based compensation is the daily wage or weekly wage or monthly salary.
- Usually the time rate is fixed in relation to a standard working week (e.g. 35 hours per week).
Time worked over this standard is known as overtime. Overtime is generally paid at a higher rate
than the standard time-rate reflecting the element of sacrifice by an employee.
- However, many employees who are paid a monthly salary do not get paid overtime. This is
usually the case for managerial positions where it is generally accepted that the hours worked
need to be sufficient to fulfil the role required.

The main advantages of time-rate pay are:

Time rates are simple for a business to calculate and administer
They are suitable for businesses that wish to employ staff to provide general roles (e.g. financial
management, administration, maintenance) where employee productivity is not easy to measure
It is easy to understand from an employee's perspective
The employee can budget personal finance with some certainty
Makes it easier for the employer to plan and budget for employee costs (e.g. payroll costs will
be a function of overall headcount rather than estimated output)
The main disadvantages of time-rate pay are:
Does little to encourage greater productivity there is no incentive to achieve greater output
Time-rate payroll costs have a tendency to creep upwards (e.g. due to inflation-related pay rises
and employee promotion.
During overtime the few who continue working may be using up more resources.

2. Output Based Compensation:

Under this method, employees are paid compensations according to the quantity of output during a
given time. The compensation is calculated as:
Compensations= Units of output x rate per unit

3. Time Based compensation with incentives:

(a) Halsey scheme:
- F.A. Halsey of the U.S.A. introduced this scheme.
- Under this scheme, for performing a job, operation or task, a standard time is specified. The
hourly rate is fixed & the workers are guaranteed so that even if, within the specified standard
time, the job is not completed by them, guaranteed time rate may be received by them.
- But if he complete the job in less than the specified time, he is given wages for the actual time he
takes to complete the job or operation at the agreed rate per hour plus a bonus equal to (usually)
50% of the wages of the time saved.
- The total earning is obtained by multiplying the sum of time allowed & time taken by half the
hourly rate.

Total wage= Time wage + (Standard time Actual time) x hourly rate.
 Advantages:
- The scheme & the calculation of the remuneration are easily understandable by the worker.
- As time wage is guaranteed, penalty is not imposed on the slow workers; whereas rewards are
provided to the slow workers for their efficiency.
- The workers are encouraged to save as much time as possible due to the bonus, because for the
higher time saved bonus will be higher.
- Employers are enabled to obtain more output from the workers under the scheme, & as a result of
that, per unit fixed overhead get diminished.
- The wages of time saved are shared by both employers and workers, so it is helpful in reducing
labor cost per unit.
- It makes distinction between efficient and inefficient workers because it provides increasing
incentive to efficient workers.
- Fixed overhead cost per unit is reduced with increase in production.

Disadvantages:
- Since the employers & employees share the savings in time, this may not be liked by many
employees organizations & they argue that the workers should get the entire benefits as the
savings is done by them.
- Quality of the work suffers because workers are in a hurry to save more and more time to get
more and more bonus.
- Compared to the other incentive plans, the workers are being offered less incentives under this
scheme.
- Apart from the workers, savings in time also depends upon the tools standards, materials, and
machinery & working conditions. So the desired result cannot be expected unless the best of
these are assured.
- Chances of more spoilage, wastage, defectives & breakdown of machinery are there under this
scheme, as for the purpose of maximizing the bonus, the workers will try to save as much time as
possible. As a result, greater supervision cost has to be involved.
- Difficulties are experienced in determining standard time and hourly rate of wages which may be
acceptable to workers.

(b) The Halsey-Weir Scheme: Under the Halsey-Weir scheme, a worker is entitled to bonus which is
equal to his time wage for 331/3% (often 30%) of the time saved; instead of 50% in case of the
Halsey scheme.
Total wage= Time wage + 3/10 (Standard time Actual time) x hourly rate.
(c) The Rowan Scheme:
- David Rowan of Glasgow (U.S.A) introduced the scheme.
- Under Rowan Plan, the standard time for the completion of a job and the rate per hour is fixed.
- If the time taken by the worker is more than the standard time, then he is paid according to the
time rate, i.e. time taken multiplied by the rate per hour.
- In case, the worker completes the work in less than the standard time; then he is entitled to a
bonus along with the time wages.
- A bonus is the percentage of workers time rate. This means the bonus/premium is calculated on
the percentage of wages earned for working on a job and is not calculated for the time-saved, as
in the case of Halsey Plan.
- This percentage is equivalent to the proportion of the time saved to the standard time.
Numerically,
Bonus = Time Saved/ Standard Time
Total wage= Time wage + (Time wage x Time saved/ Standard time)

Advantages:
- Because the premium is proportionate to the time saved, if the rate has been wrongly fixed,
the effect will be less serious. So Rowan scheme is safer than the Halsey scheme, as far as
the point of view of employer is concerned.
- The worker is in the most advantageous position when 50% of the time allowed is saved by
him, because otherwise his earning per hour will increase at a diminishing rate, if any more
 time is saved by him. As a result, the chances of wastage, defectives, breakdown etc. will be
less as there is a limit to speed.

4. Going Rate approach

- Based on local market rates
- Relies on survey comparisons among; local nationals (HCNs), expatriates of same nationality,
expatriates of all nationalities
- compensation based on the selected survey comparison
- base pay and benefits may be supplemented by additional payments for low-pay countries
Advantages
- equality with local nationals
- simplicity
- identification with host country
- equity amongst different nationalities
Disadvantages:
- variation between assignments for same employee
- variation between expatriates of same nationality in different countries
- potential re-entry problems
5. Balance sheet approach
Many multinational firms have compensation programs that use the balance sheet approach. The
balance-sheet approach provides international employees with a compensation package that
equalizes cost differences between the international assignment and the same assignment in the
home country of the individual or the corporation.
- Advantages: Equity between assignments and between expatriates of the same nationality,
facilitates expatriate re-entry, and easy to communicate to employees
- Disadvantages: Can result in great disparities between expatriates of different nationalities
and between expatriates and local nationals, can be quite complex to administer

What are the characteristics of an ideal compensation package?

Patton suggests that in compensation policy there are seven criteria for effectiveness.
Compensation should be:
1. Adequate Minimal governmental, union, and managerial levels should be met.
2. Equitable Each person should be paid fairly, in line with his or her effort, abilities, and training.
3. Balanced: Pay, benefits, and other rewards should provide a reasonable total reward package.
4. Cost-effective Pay should not be excessive, considering what the organization can afford to pay.
5. Secure: Pay should be enough to help an employee feel secure and aid him or her in satisfying
basic needs. It should be progressive (forward-thinking)
6. Incentive-providing: Pay should motivate effective and productive work.
7. Acceptable to the employee: The employee should understand the pay system and feel it is a
reasonable system for the enterprise and himself or herself.

Reward
- Payoff for efficient and effective performance may be regarded as reward.
- Rewards are positive outcomes that are earned as a result of an employee's performance. These
rewards are aligned with organizational goals. When an employee helps an organization in the
achievement of one of its goals, a reward often follows.
Types of Rewards
Intrinsic rewards Extrinsic Rewards
An intrinsic reward is an intangible award of An extrinsic reward is an award that is tangible
recognition, a sense of achievement, or a or physically given to employees for
conscious satisfaction. In other words, the accomplishing something.
satisfactions one gets from the job itself are its
intrinsic rewards.
These satisfactions are self-initiated rewards Extrinsic rewards are external to the job and
come from an outside source, mainly,
management.
If an employee experiences feelings of If the employee receives a salary increase or a
achievement or personal growth from a job, we write up in the company magazine, we would
would label such rewards as intrinsic. label those rewards as extrinsic.
 These include interpersonal relationship, Extrinsic rewards include money, promotions,
personal achievement, professional growth, and fringe benefits, a certificate of
sense of pleasure and accomplishment. The accomplishment, a trophy or medal for
techniques of flex time, job enrichment, shorter outstanding performance in job.
work weeks, and job rotation, can offer intrinsic
rewards by providing interesting and challenging
jobs and allowing the employee greater
freedom.

Compensation vs Reward

Compensation
Compensation can be defined as the adequate
and equitable remuneration of personnel for
their contributions to the organizational
objectives.
Compensation provided to all employees
according to the agreement between employer
and employee. It is the value of work of the
employees.
Reward
Rewards is one part of compensation. Payoff for
efficient and effective performance may be
regarded as reward. It includes a monetary or
no monetary recognition given to an employee
for his better performance.
Reward may be provided based on
performance, effort, skill, seniority, job difficulty,
good behavior and honesty.

Factors/Criteria on which Reward can be distributed

1. Performance: Reward is basically based on the level of job performance ability of an individual.
The one who can perform the job well can get high reward in comparison to the poor performer.
Hence, under this criteria of reward distribution, an individual's performance is evaluated before
assigning any reward.

2. Effort: Where the question of employee performance is a low caliber, the only one way of
rewarding employees is the basis of effort. Through this criterion one can exert the input of
individual for organizational activities.

3. Seniority: Seniority is one of the traditional ways of determining rewards in the organization, under
which, the rewards are provided to those individuals who have served relatively for longer period
(on tenure basis).

4. Skill Held Under this criterion of reward distribution, individuals having special skills are rewarded,
regardless of whether the skills are used. These individuals who possess the highest talents are
rewarded.

5. Job Difficulty The complexities of the job are considered as the basis of rewarding employees. It
assumes that the complex and difficult jobs require higher attention and concentration at work.
So, these types of job holders should be rewarded.

6. Discretionary Time: This criterion is based upon the time taken for decision making. More time for
decision making means more probability of getting reward. This is because such jobs may have
occur the chances of error hence, there is a need for careful judgement.

7. Reward can be also distributed based on honesty and good behaviour.

KUMKUM SULTANA (26th Batch,

DM, CU)