Compensation Management

and Employee Relations

UNIT-4
 compensation
• The term compensation is used to indicate the employee’s gross earnings in
the form of financial rewards and benefits.
• Compensation can also be defined as follows:
• 1. A system of rewards that can motivate the employees to perform.
• 2. A tool that is used to foster values and culture.
• 3. An instrument that enables an organization to achieve its objectives.
• Compensation can be of two types—direct and indirect.
• Direct Compensation:
• 1. Basic pay, dearness allowance, cash allowance
• 2. Incentive pay, bonus, commission, profit sharing, stock option

• Indirect Compensation:
• 1. Legal requirement
• a. Provident fund
• b. Gratuity
• c. Pension
• d. Insurance
• e. Medical leave
• f. Accident benefits
• g. Maturity leave
• . Optional sick leave
• . Casual leave
• . Travelling allowance
• . Telephone bills
• . Canteen allowance
• . Club membership
• 1. The compensation should be paid to each employee on the basis of their
abilities and training.
• 2. Compensation should be in the form of package.
• 3. It should motivate the employees towards increasing productivity.
• 4. It should be capable of taking care of employees for safety and security
needs also.
• 5. It should be flexible and clear.
• 6. It should not be excessive.
• 7. Compensation should be decided by the management as per the norms
fixed by the legislations in consultation with the union.
 .
• .
 Cont..
• Direct compensation
It 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, bonus, PF/Gratuity, etc. They are given at a regular
interval at a definite time.

• Indirect compensation
It refers to non-monetary benefits offered and provided to employees in
lieu of the services provided by them to the organization. They include
Paid Leave, Car /transportation, Medical Aids and assistance,
Insurance(for self and family), Leave travel Assistance, Retirement
Benefits, Holiday Homes.
 Component Of Pay Structure/Components Of Employee And
Executive Compensation

Guaranteed pay :-
• Guaranteed pay is a fixed monetary (cash) reward.
• The basic element of guaranteed pay is base salary which is paid on an
hourly, daily, weekly, bi-weekly or monthly rate. Base salary is typically
used by employees for ongoing consumption. Many countries dictate the
minimum base salary defining a minimum wage. Employees' individual
skills and level of experience leave room for differentiating income levels
within a job-based pay structure.
• In addition to base salary, there are other pay elements which are paid
based solely on employee/employer relations, such as salary and seniority
allowance.

• Variable pay – a non-fixed monetary (cash) reward paid by an employer to an

employee that is contingent on discretion, performance, or results achieved. The
most common forms of variable pay are bonuses and incentives.
 CONT..
• Benefits – programs an employer uses to
supplement employees’ compensation, such
as paid time off, medical insurance, company car,
and more.

•  Equity-based compensation – stock or pseudo

stock programs an employer uses to provide
actual or perceived ownership in the company
which ties an employee's compensation to the
long-term success of the company. The most
common examples are stock options.
 CONT..
• FRINGE BENEFITS- The remuneration that the employees receive for
their contribution cannot be measured by the mere estimation of wages and
salaries paid to them. Certain supplementary benefits and services known
as “fringe benefits” are also available to them. The characteristics of fringe
benefits are: These benefits are distinctly additional to the regular wages
paid to the workers. As such, they are not provided as a substitute for
wages or salaries of the employees.
• These benefits are meant primarily to be of advantage to the employees.
• The advantages accrued to the employees through the provision of fringe
benefits are as such they cannot be secured through their own individual
efforts.
• Only those benefits fall within the purview of fringe benefits which are or
can be expressed in cash terms.
 .
• .
 CONT..
• Internal factors: The internal factors exist within the organization and influences the pay
structure of the company. These are as follows:
• Ability to Pay: The prosperous or 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.
• Business Strategy: The organization’s strategy also influences the employee compensation. In
case the company wants the skilled workers, so as to outshine the competitor, will offer more
pay as compared to the others.Whereas, if the company wants to go smooth and is managing
with the available workers, will give relatively less pay or equivalent to what others are paying.
• Job Evaluation and Performance Appraisal: The job evaluation helps to have a satisfactory
differential pays for the different jobs.The performance Appraisal helps an employee to earn
extra on the basis of his performance.
• Employee: The employee or a worker himself influences the compensation in one of the
following ways.
Performance: The better performance fetches more pay to the employee, and thus with the
increased compensation, they get motivated and perform their job more efficiently.
Experience: As the employee devote his years in the organization, expects to get an increased
pay for his experience.
Potential: The potential is worthless if it gets unnoticed. Therefore, companies do pay extra to
the employees having better potential as compared to others.
 CONT..
• External Factors: The factors that exist out of the organization but do affect the employee compensation
in one or the other way. These factors are as follows:
• Labor Market: The demand for and supply of labor also influences the employee compensation. The low
wage is given, in case, the demand is less than the supply of labor. On the other hand, high pay is fixed,
in case, the demand is more than the supply of labor.
• Going Rate: The compensation is decided on the basis of the rate that is prevailing in the industry, i.e.
the amount the other firms are paying for the same kind of work.
• Productivity: The compensation increases with the increase in the production. Thus, to earn more, the
workers need to work on their efficiencies, that can be improved by way of factors which are beyond
their control.The introduction of new technology, new methods, better management techniques are
some of the factors that may result in the better employee performance, thereby resulting in the
enhanced productivity.
• 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.
• Labor Unions: The powerful labor unions influence the compensation plan of the company. The labor
unions are generally formed in the case, where the demand is more, and the labor supply is less or are
involved in the dangerous work and, therefore, demands more money for endangering their lives.The
non-unionized companies or factories enjoy more freedom with respect to the fixation of the
compensation plan.
• Labor laws: There are several laws passed by the Government to safeguard the workers from the
exploitation of employers.The payment of wages Act 1936, The Minimum wages act 1948, The payment
of Bonus Act 1965, Equal Remuneration Act 1976, Payment of Gratuity Act 1972 are some of the acts
passed in the welfare of the labor, and all the employers must abide by these.
• .

Employee incentive schemes

 Incentive Plans
• Incentive plans predict a basic rate usually on time basis applicable to all
workers & incentive rates payable to the more efficient among them as extra
compensation for their meritorious performance in terms of time, costs &
quality. The incentive rates may take the form of bonus or premium.
Features of Incentive plans:
 Four characteristics common to successful bonus plans. They:
• Are specific, not arbitrary, and are in writing;
• Are tied to performance standards;
• Make substantial bonuses; and
• Handcuff the key employee to the business.
 Objective of Incentive Plans
• Increase in productivity
• Reduction in labor costs
• Improvement in efficiency
• Rise in worker’s earnings
• Higher employee motivation & morale
• Greater contribution to organizational effectiveness
• Encouraging employees to achieve specific organizational goals, such as
increasing profits, improving product quality, etc.
 Prerequisites for An Effective Incentive System

• The Co-operation of workers in the implementation of an incentive scheme.

• The scheme must be based on scientific work measurement.
• Indirect workers, such as supervisors, foremen, charge hands, helpers, crane
operators, canteen staff, store keepers & clerical staff should also be covered
by incentive schemes.
• There should be management commitment to the cost & time necessary to
administer incentive scheme.
• Greater need for planning incentive scheme.
 Other Safeguards are:
• Appropriate to the type of work carried out & workers employed.
• The reward should be clearly & closely linked to the efforts of the individual
of group.
• Individual or groups should be able to calculate the reward they get at each
of the levels of output they are capable of achieving.
• Individuals or groups should have a reasonable amount of control over their
efforts & therefore their rewards.
• The scheme should operate by means of well-defined & easily understood
formula.
• The scheme should properly installed & maintained.
• Provisions should be made for controlling the amounts paid, to ensure that
they are proportionate to effort.
• Provisions should be made for amending rates in defined circumstances.
• Create incentives for performance & disincentives for non-performance.
• Set & review specific objectives for each employee periodically.
 Scope of Incentive Schemes
• INCENTIVE SHEMES ARE DIFFICULT TO APPLY IN:
 Industries in which measurement of individual or group output is rendered
difficult or impossible either by technical consideration or by psychological
circumstances which might be prejudicial to output;

 Industries in which the control of quality is necessary & is particularly difficult,

or in the case of certain classes of workers, where high quality & accuracy of
work is of prime importance &

 Industries in which the work is dangerous & it is particularly difficult to ensue

the observance of adequate safety precautions
.
 Individual
• Time based incentive plan
• Under time based plan, per hour wage rate is determine and incentives paid
on the bases of time saved.
• Time based incentives plan is divided in four different ways.
• Halsey plan, rowan plan, emerson plan, bedeuax plan
• This all plan more or less follow same method, but with different formula.
• Output based incentive plan-
• Under output based plan, per piece wage rate is determined and incentives
paid on the bases of output produced.i.e. more output in standard time or
standard output in less time. for output based incentive following 3 method
can be used.
• Taylor plan, merrick plan, gantt plan.
.
• Halsey Plan : Recognizes individual efficiency & pays bonus on the basis of
time saved. Main features are:
 Standard time is fixed for each job or operation.
 Time rate is guaranteed & the worker receives the guaranteed wages
irrespective of whether he completes the work in the time allowed or takes
more time to do the same.
 If the job is completed in less than the standard time, the worker is paid a
bonus of 50% of time saved at time rate in addition to his normal time wages.

Total Earnings = Time Taken* Hourly Rate + Bonus

Bonus = 50% of time saved (1/2*Time Saved*Hourly Rate)
https://books.google.co.in/books?
id=uxJ_AgAAQBAJ&pg=PA428&lpg=PA428&dq=earnings+vary+in+same+pro
portionate+as+output&source=bl&ots=ONLm1Jfx2_&sig=ihUUjlO4d60Qnwc
hW_mCgm4TSF8&hl=en&sa=X&ved=0ahUKEwiPzdLd6q_SAhVGipQKHdqrCE
0Q6AEIIDAB#v=onepage&q=earnings%20vary%20in%20same
%20proportionate%20as%20output&f=false
• Rowan Plan: Bonus paid to the employee is equal to the proportion
of the time saved to the standard time.

Time Saved
Bonus = Time Taken Hourly Rate
Std. Time

Total Earnings = Time Taken * Hourly Rate + Bonus

E.g. Std Time =10hrs

Rate per Hr = Rs1

Time Taken = 8hrs

Bonus = 2/10*8*1 =Rs 1.60
Earnings = 8*1+1.60 =Rs. 8
=Rs 9.60
 Group Incentive

Advantages:
 Better co-operation among workers
 Less Supervision
 Reduced incidence of absenteeism
 Reduced clerical work &
 Shorter training time.
Disadvantages:
 An efficient worker may be penalized for the inefficiency of the
other members.
 The incentive may not be strong enough to serve its purpose &
 Rivalry among the members of the group defeats the very purpose
of team work & co-operation.
 Incentive Schemes in Indian Industries

• Introduces in 1946
• Not identical within industries also.
• Modifications done as per the suitability.
• Still in infancy stages
 Setting up an incentive scheme: steps to take

• An incentive scheme is perhaps the most straightforward way to motivate staff. If you are
considering setting up one you should:
• Identify the scheme's objectives. For example, encouraging the recruitment or retention of
staff, changing the organisational structure of the workplace or reducing any likely areas of
conflict. Alternatively, you might want to encourage teamwork and motivation or to set
specific targets for productivity, revenue or sales.
• Consult with staff and trade unions. This will help you identify where to aim the incentives,
eg at your entire workforce, managers or a specific group of employees. It will help you find
out what incentives your staff value most and what training they need to achieve a target.
• Relate the scheme to the business' remuneration system. Consider whether the incentive
should be financial or non-financial. Think about how the proposed incentive will relate to
other cash benefits and how much administration will be needed.
• Establish any tax implications for your staff. Consider related costs and funding
• Ensure that the planned scheme is competitive. Look at similar schemes within other
businesses.
• Decide on performance measures for your staff. You might set targets for performance or
work quality.
• Run a pilot scheme and evaluate results. See ensuring the incentive scheme is successful.
• Regularly review your scheme and obtain feedback. Make sure that you document,
communicate and obtain feedback from staff at all times.
 Recent Trends In Compensations
Management
Recent Trends
• Group Mediclaim Insurance Scheme
• Personal Accident Insurance Scheme
• Company Leased Accommodation
• Recreation, ATM and Concierge facilities
• Corporate Credit Card
• Cellular Phone / Laptop
• Personal Health Care (Regular medical check-ups)
• Loans
• Educational Benefits (For Higher studies)
• Flexi-time
• Regular Get together and other cultural programs
• Wedding Day / Birthday Gift
• Employee Referral Scheme
• Maternity Leave
• Employee Stock Option Plan
Meaning and nature of employee relation

• Employee relations refer to the relationship

shared among the employees in an
organization. The employees must be
comfortable with each other for a healthy
environment at work. It is the prime duty of
the superiors and team leaders to discourage
conflicts in the team and encourage a healthy
relationship among employees.
Employee Relations
People in organizations interact with each other during work, formally and officially as
well as socially and informally. During the course of interaction, relationships develop,
which are invisible connecting links, coloured by emotions of love, hate, repulsion,
respect, fear, anxiety and so on.

Example: These are usually mutual but not necessarily reciprocal. If A hates B, it does
not follow that B hates A. It is possible that B loves A and even sympathizes with his
thoughts.

Relationships imply feelings for each other. They may be positive (friendly, wanting to
be close) or negative (unfriendly, wanting to be distant). Relationships always exist
between interacting persons. There is no neutral point. Indifference is not neutral.
Indifference tends to be negative.

Continued..
Employee Relations
Relationships influence behaviours at work. Expectations of each other, perceptions of
the intentions of either, distributions of assignments, readiness to conform or to
rebel, enthusiasm to contribute, etc., are to some extent outcomes of these
relationships. Attitudes and motivations influence, and are influenced by, the
nature of these relationships.

Employees are pillars of the organization with the potential skills in their fields.

Employee Relations are practices for ensuring that Employees are happy and are
productive.

Employee Relations offers employee recognition, policy development and all types of
problem solving.

Continued..
Employee Relations
Today, Employee Relations is a much broader concept. It involves maintaining a
work environment that satisfies the needs of individual employees and
management.

Improving employee morale, building company culture, conveying

expectations.
Three Types, with HRM Intervening
1) Employer to Employees (Downward Communication)
2) Employees to Employer (Upward Communication)
3) Amongst Employees (Horizontal Communication)
Employer to Employees (Downward Communication)
1) Training and Induction
2) Benefits
3) Safety
4) Career Development and Job Opportunities
5) Stress Management and Recreation Facilities
6) Collective Problem Solving
7) Involvement and Engagement
8) Rewards and Recognition
Employees to Employer (Upward Communication)
1) Feedback
2) Performance Appraisal
Amongst Employees (Horizontal Communication)
♦ Annual Events and Magazines

Annual events are a way of getting to know the employee on a personal level.
It is also a team building exercise and is common in all companies.

In-house magazines too are common. They tell the employee about the
company and employee participation is encouraged by articles.

♦ Welfare Activities

The objective of providing welfare facilities is to ensure that employee

attention is not diverted from work to maintenance activities. It also aims to
provide a caring environment that enhances the satisfaction of the employee
with working conditions
Advantage of Maintaining Good Employee Relation
Following are the advantages of maintaining good relations with employees:

♦ Reduced Absenteeism
♦ Improved Morale & Motivation.
♦ Harmony in the Organization
♦ Lesser attrition - reduced cost on training, less cost of retention
♦ Attract good talent
♦ Responsible for increase in productivity.
♦ Open to organizational / hierarchical changes (flexibility)
♦ Shared learning and Continuous improvement.
 Industrial Relations.
 I.R is a relation b/w employer & employees, employees & employees,
employees & trade union.
-“Industrial Dispute Act,1947”

I.R is a relationship b/w management & employees or among employees

& their organization, that characterize and grow out of employment.
- “Dale Yoder”

I.R deals with either the relationships b/w the state and the employer’s
and workers organisation or the relation b/w the occupational
organisation themselves.
-“I.L.O” (International Labor Organisation)
NATURE OF I.R
1. Part of Management (manpower)
2. Outcome of employment relationship
3. Skill development (to adjust & co-operate)
4. Creates rules & regulations(harmonious relation)
5. Involvement of Govt.(shapes the I.R through laws,
policies)
 What is Gratuity?

The gratuity meaning can be explained by the

amount paid by an employer to its employees
for rendering their services for 5 or more
years. Gratuity is paid to an employee as part
of his/her salary and is considered to be a
benefit plan which is designed to help the
employee during his/her retirement.
 To whom is Gratuity Paid – Eligibility Criteria

Employees are eligible for receiving gratuity in the

following cases-
• The employee should be retired from his/her service
• The employee should be eligible for superannuation
• The employee should have resigned after completing
5 years of service with any one organization
• If the employee passes away or suffers disability due
to illness or accident
 Gratuity Calculation

To calculate the gratuity for employees who are

covered under the Payments of Gratuity Act 1972,
you must have the number of years of the employees’
service and the employees’ last drawn salary, and
then follow this formula- Gratuity = Last drawn salary
* (15/26) * Number of years of service On the other
hand, to calculate the gratuity for employees who are
not covered under the Payments of Gratuity Act 1972,
you must use the following formula- Gratuity = Last
drawn salary * (15/30) * Number of years of service