Compensation is an important activity of Human Resource Management (HRM). It plays a significant role for the employee as well as the employer.
For the employee, compensation is the main source of livelihood and determines his/her standard of living, status in the society, motivation, loyalty, and productivity.
For the employer, compensation is an instrument of procuring (attracting), maintaining, developing, promoting, and motivating the employees and getting effective results from them.
Compensation also constitutes a significant component of the operating costs of business. Many battles, in the form of strikes and lockouts, are fought between the employer and the unions on issues relating to employee compensation.
Since compensation is such an important function, it is essential that organizations pay adequate attention in formulating and implementing judicious policies about compensation.
1. Introduction to Employee Compensation 2. Meaning of Employee Compensation 3. Definitions of Employee Compensation 4. Concept 5. Objectives 6. Characteristics 7. Components 8. Factors 9. Theories 10. Types 11. Importance 12. International Compensation and Its Benefits.
Employee Compensation: Meaning, Definitions, Concept, Factors, Types, Objectives, Importance and Characteristics
- Introduction to Employee Compensation
- Meaning of Employee Compensation
- Definitions of Employee Compensation
- Concept of Employee Compensation
- Objectives of Employee Compensation
- Characteristics of Employee Compensation
- Components of Employee Compensation
- Factors Affecting Employee Compensation
- Theories of Employee Compensation
- Types of Employee Compensation
- Importance of Employee Compensation
- International Compensation and Its Benefits
Employee Compensation – Introduction
Designing an effective compensation programme, given cost constraints, greater demands, and greater professional expertise, requires more creativity and vision than ever before.
In the recent past, several changes have taken place in compensation packages. There has been a tremendous increase in the diversity of pay packages being offered by organizations. There was a time when employers in public-sector organizations were the most highly paid in terms of scales of pay and benefits offered. The state-level public sectors had their own pay structures, and the private sector had its own strategy in this respect.
The important issue is ‘does money matter?’ The answer is yes. Money definitely provides a means for having a more affluent lifestyle—better clothes, vacations, better education, and so on. How much we earn often determines how we view ourselves, and our social status.
In job situations, money motivates behaviour when it rewards people in relation to their performance or contributions, that is, when the employer or management is perceived as fair and equitable and provides rewards in recognition of the employee’s true value. It is also interesting to note that particular components of pay have different values for different people.
For example, research indicates that younger people tend to focus on cash compensation, whereas as people age, their preferences shift to benefits and workplace flexibility. Hence at different stages in one’s life and career, pay and compensation are perceived differently.
Employees’ satisfaction with pay is an important criterion. Research also indicates that individuals differ in the way in which they conceptualize pay satisfaction. Pay satisfaction is a result of input-outcome ratio. Here inputs refer to effort, skill, education, previous work experience, special interest and so on.
Outcomes are what people get out of their jobs, such as pay, promotions, recognition, and so forth. Besides this, employees also tend to compare themselves with others in terms of their inputs and outcomes. When the employee perceives that there is some amount of fairness in the compensation they receive, the likelihood of experiencing satisfaction is more.
Research also indicates that employee satisfaction with pay is directly proportional to commitment to the organization and trust in the management, while it is inversely related to absenteeism and lateness, seeking alternative employment opportunities, terminating employment with the organization, and incidence of theft.
Employee Compensation – Meaning
Compensation is an important activity of Human Resource Management (HRM). It plays a significant role for the employee as well as the employer. For the employee, compensation is the main source of livelihood and determines his/her standard of living, status in the society, motivation, loyalty, and productivity. For the employer, compensation is an instrument of procuring (attracting), maintaining, developing, promoting, and motivating the employees and getting effective results from them.
Compensation also constitutes a significant component of the operating costs of business. Many battles, in the form of strikes and lockouts, are fought between the employer and the unions on issues relating to employee compensation. Since compensation is such an important function, it is essential that organizations pay adequate attention in formulating and implementing judicious policies about compensation.
The main focus of discussion in this article is on these and some other important aspects related to employee compensation. Compensation planning and management in the language of HRM is also expressed as wages and salary administration. It refers to a systematic procedure for establishing a sound compensation structure.
In the absence of a sound compensation policy, wages are likely to be based on personalized arbitrary decisions without due regard to wage structure. The four closely related aspects in a system of wage and salary administration are wage and salary survey, job evaluation, merit rating, and incentives.
Compensation refers to a wide range of financial and non-financial rewards to employees for their services rendered to the organisation. It is paid in the form of wages, salaries and employee benefits such as paid vacations, insurance, maternity leave, free travel facility, retirement benefits, etc. Monetary payments are a direct form of compensating the employees and have a great impact in motivating the employees.
A sound system of compensation is important for every organisation because of the following reasons:
(i) Capable employees are attracted towards the organisation.
(ii) The employees are motivated for better performance.
(iii) The employees do not leave the employer frequently.
Employee Compensation – Definitions by Eminent Thinkers: Jack Welch and Garry Dessler
The word ‘Compensation’ has been derived from the word ‘Compensate’ which means to pay or make up for something. In case of employee compensation, obviously, it means compensation or payment for the services rendered.
Most of us would have heard the term “compensation” in the context of getting paid for the work that we do. The work can be as part of full time engagement or part time in nature. What is common to them is that the “reward” that we get for expending our energy not to mention the time is that we are compensated for it.
Let us consider some definitions to understand the meaning better:
According to Jack Welch – “If you pick the right people and give them the opportunity to spread their wings and put compensation and rewards as a carrier behind it – you almost don’t have to manage them.”
Compensation can also be defined as “the return that an employee received from the organization for the work he does for it. Compensation occupies an important place in life of every employee”.
According to Gary Dessler, “compensation refers to all forms of pay going to employees and arising from their employment. It has two main components namely (i) Direct financial payment, and (ii) Indirect financial payment”.
Compensation From the perspective of the employers can be defined as “the money that they pay to the employees in return for the work that they do is something that they need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in agreement, the net result is dissatisfaction from the employee’s perspective and friction in the relationship”.
Compensation can be viewed as the “glue” that binds the employee and the employer together and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that spells out exactly how much should be paid to the employee and the components of the compensation package.
Maslow’s Need Hierarchy Theory talks about compensation being at the middle to lower rung of the pyramid and the other factors like job satisfaction and fulfilment being at the top, for a majority of employees, getting the right compensation is by itself a motivating factor.
Hence, employers need to quantify the employee’s contribution in a proper manner if they are to get the best out of the employee. The provision of monetary value in exchange for work performed forms the basis of compensation.
In fact, Compensation means something which offsets or makes up for something else.
The current trend in many progressive sectors is to treat the employees as “creators and drivers of value” rather than a mere factor of production, companies around the world are paying close attention to how much they pay, the kind of components that this pay includes and whether they are offering competitive compensation to attract the best talent.
Employee Compensation – Concept
Compensation is an earning to the employees, a cost to the employer and a potential for taxes to the Government. It is a measure of one’s capabilities and compatibility to the organization and the job so as to decide the remuneration to be paid. At the same time, it is the largest source of purchasing power, which in turn affects the socio-economic vales of a place, state, region or a nation.
It is a reward to an individual for the physical and/or mental efforts he/she makes to perform any job in terms of monetary gains and/or benefits to motivate and satisfy him/her at the work place.
Thus, compensation could be defined as the reward for any work or services offered by an individual to any organization or institution. To some, compensation may reflect the value of their personal skills and abilities, while to others it may refer to the return on the educational qualifications or the training they have acquired.
To some, it may be their worth in a specific role or a job, based on their qualification, training, skills and expertise that they possess. The form of compensation, the type of compensation and the disbursement pattern of the compensation thus become a part of the employment agreement.
There are a number of terms associated with compensation, which define compensation to different classes of employees, professional and workers.
i. Wages – Hourly, daily, weekly or monthly payment to workers for their efforts to perform any task is generally referred as a wage. As per Stroud’s Judiciary Dictionary, wages are defined as “personal earning of the labourers and artisans”. However, because of the influences of the government in the fixation of wages, the types of wages are many.
ii. Salary – It is the remuneration paid to the staff (clerical, ministerial, secretarial, administerial, security etc.) or executives/managerial personnel on a monthly basis.
iii. Gross Salary – This is an amount agreed to be paid to any staff/executive including all the money values for compensation, benefits and facilities that can be enjoyed by him/her in the employment. It can be claimed monthly or annually.
iv. Take home Salary – This part of compensation is the amount, an employee takes in hand after making the statutory deductions.
v. Fees/Commission – It is a compensation made to any individual/agent for the efforts made to get any work done through him/her or because of his/her involvement as a special service.
vi. Labour Charge – When payment is made to any individual for the physical efforts on request for a period of time or for a specific purpose, it is called his/her labour charges, such as packing, loading, unloading, digging a hole, shifting of some material or machine, etc.
Besides the above, the modern concept of compensation management has popularized the following definitions amongst employers and employees.
i. Pay Package – When an individual is employed in any organization/institution, the assurance of payment to him/her is made in terms of a pay package, i.e., what total emoluments he/she may get if the employment is accepted. This covers both direct and indirect payments, allowances and incentives, if any.
ii. Compensation – It is a modern term for wage/salary to give a weightage of equity and a satisfaction of his/her worth to an individual offering his/her services and/or efforts for any specific job or position.
Employee Compensation – 12 Important Objectives
1. To recruit and retain qualified employees.
2. To increase or maintain morale/satisfaction.
3. To motivate employees for better performance.
4. To attract and retain skilled and talented/workforce.
5. To determine basic wages and salary administration.
6. To achieve internal and external equity.
7. To ensure equal pay for equal work, that is, each individual’s pay is fair in comparison to that of another person doing a similar job.
8. To support, communicate and reinforce an organization’s culture, value and competitive strategy.
9. To reduce turnover and encourage company loyalty.
10. To reward for exceptional job performance with plans including bonuses, commissions, profit sharing, stocks, gain sharing etc.
11. To control cost – A rational compensation system helps the organization to obtain and retain workers at a reasonable cost.
12. Comply with legal regulation – A sound wage and salary system consider the legal challenges imposed by the government and ensures the employees compliance.
Morale and job satisfaction is affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt by the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expense of satisfaction and morale. Conversely, an employer willing to reduce employee turnover may seek to increase salaries and salary levels.
Employee Compensation – 5 Main Characteristics: Internal Equity, External Competitiveness, Affordability, Legal Obligations and Flexible
The following characteristics are essential for every compensation program in order to attract, motivate and retain competent employees.
1. Internal Equity:
It is a measure of how an organization values each of its jobs in relation to one another. Internal equity exists when an employer pays wages corresponding with the relative internal value of each job.
2. External Competitiveness:
It is a measure of an organization’s wage and salary structure compared to that of its competitors in the job market doing the similar or same type of business. External equity exists when an employer pays a wage rate equal to the prevailing wage rate in external labour markets.
If pay structures are not formulated responsibly then an organization could end up paying labour costs that exceed what it can afford to pay to its employees.
4. Legal Obligations:
Any compensation program should be in conformity with the existing wage related legislations to provide fairness in how employees are paid.
Pay programs are necessary tools to fight for labour in the marketplace. It should be flexible enough and capable of changing as required.
Employee Compensation – Top 4 Components: Wage and Salary, Incentives, Fringe Benefits and Perquisites
Components of compensation are as follows:
Component # 1. 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.
Wage 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.
Component # 2. 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.
Component # 3. Fringe Benefits:
Fringe benefits include such benefits which are provided to employees either having long-term impact like provident fund, gratuity, pension; or occurrence of certain events like medical benefits, accident relief, health and life insurance; or facilitation in performance of job like uniforms, canteens, recreation, etc.
Component # 4. 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.
Employee Compensation – 4 Important Factors Affecting Compensation: Individual, Organizational, Competitive, Product Cost Factor and a Few Other Factors
Generally, the following factors affect the compensation:
1. Individual factor
2. Organizational factor
3. Competitive factor
4. Product cost factor.
Employees as individual worries about compensation worth, while compensation differentiations depends on sex, skill, experience and level of competition. In designing the compensation structure, individual skill, knowledge, expertise, attitude, sex, work environment and experience play an important role to fix the level of the job to meet the job description regarding the personality of an individual.
Similarly the creativity, innovation, imitation desired to be used on specific job also matters. These factors determine the worth of an employee for the specific job and help in designing wage/salary differentiations.
Organisational earning depends on productivity of employees and their efficiency. This measures the company’s ability to pay. Besides this the size and technology required to perform any task and the span of control depending upon the size and nature of organization. The capacity to pay also depends upon the financial strength of the company, size, nature, and number of levels and cost of technology being used in the organization.
The level of pay will depend on the mission and vision of the organization. That means whether the organization is willing to lead, develop competitiveness or meet the changing environments. This helps to decide the datum for the minimum and maximum rangers to the entry level, middle level or higher level or to retain the old talents.
It is a process of converting the job price into a monetary award to the employee performing or going to perform that job. The process, thus, covers job analysis, job pricing, considerations of W/S survey and government legislation, organizational capacity to pay and developing pay packages to different levels of employees.
Besides the above common factors affecting design, the following considerations need careful analysis in finalizing wage or salary structures for effective administration and management –
i. Company’s objective and mission.
ii. Marketing rates and trends to fulfil objectives of external equity.
iii. The organizational ability to pay to maintain the commitments.
iv. Supply and demand elasticity to view the future conditions of market values.
v. Cost of living in the region.
vi. Productivity linked performance.
vii. Strengths of unions and their pressure on compensation.
viii. Company’s goodwill and image in the market.
ix. Various Government legislations to protect the interests of the employees.
x. Tribunals’ judgments on compensation disputes.
i. Company’s objective and mission – Every organization irrespective of its size, nature and technology has its own objectives and HR policy and may have varying numbers of grades or structures to accomplish its mission.
ii. Marketing rates and trends to fulfil objectives of external equity – With the changing business environments, the market rates and expectations of the employees keep on changing. Therefore, to design a most acceptable compensation structure, the employer needs to understand the prevailing market conditions and its trends.
iii. The organizational ability to pay to maintain the commitments – Though every employer is bound to pay at par with the market rates, some may have their own constraint to pay higher or at par because of the size, technology and numbers of employees. The capacity to pay, therefore, is an important factor in designing the pay structures.
iv. Supply and demand elasticity to view the future conditions of market values – The supply and demand vary and operate at regional/state or national levels. In designing the compensation structures, the impact of demand and supply elasticity of the region/state or the nation cannot be overlooked as the rates are bound to vary according to the demand and supply ratio.
v. Cost of living in the region – The cost of living or standard of living also varies from place to place which is to be considered in designing the variable component of compensation to provide an adequate cushion for increasing cost of living.
vi. Productivity linked performance – Every employer’s main aim is to earn returns on investment and paying compensation to the employees is an investment on human resource. Therefore, they weigh the compensation as a cost to the company and would like to work out the returns on whatever they pay. Productivity linked performance, thus, becomes an important factor in designing the pay-packages.
vii. Strengths of unions and their pressure on compensation – Trade unions are one of the wage fixation machineries. Their bargaining strength depends on the number of members and the nature of leadership. Sometimes the stronger unions pressurize for faster pay revisions or demand higher pay-packages irrespective of productivity. Therefore, their strength is also important in designing the wages or salaries.
viii. Company’s goodwill and image in the market – Depending upon the company’s image in the market and goodwill earned, some companies will have to consider a higher pay structure to differentiate themselves in the market.
ix. Various Government legislations to protect the interests of the employees – Government’s policies and socio-economic plans also consider the employment rates and protection of sweated workers and their social welfare. The Government reviews them from time to time and frames and enacts various legislations to control the employment conditions or compensation structures.
x. Tribunals’ judgments on compensation disputes – The Government has also established labour courts and tribunals to settle the differences between the employers and the employees, and therefore the orders passed by them become one of the guidelines to design a structure to avoid the reoccurrence of such disputes.
Employee Compensation – 7 Important Theories: Wage Theories, Wage Fund, Subsistence, Surplus Value, Marginal Productivity and a Few Others
1. Wage Theories:
The fixation of wages of employees of an organization has been subject of discussion for quite some time, rather from the time one individual started working for another individual. Initially he was compensated in kind and subsequently, when money was invented, he was paid in money.
However, how much to pay to an individual for the services he rendered, has remained a subject of discussion and debate. Many economists have worked on this aspect and in the process, have propounded various theories of Wages. We list and discuss very briefly some of these theories of Wages.
However, while going through the theories, it must be kept in mind that most of these theories were propounded when the industry had not developed to its present state and the technology had just started to develop. The basic idea developed in some of these theories is still being used in some form or the other.
2. Wages Fund Theory:
This theory was propounded by Adam Smith. His contention was that the wages are paid out of a fund of wealth which a rich person has been successful in creating through his savings. Once this fund is available, the rich person would employ labour to carry out the work to be assigned by him.
The quantum of wages payable to the labour was dependent upon the size of the fund or the amount available in the fund. In case, the amount in the fund was large, then the employer would pay higher wages otherwise, he would pay lower wages when the fund was small.
We could find some relevance of this theory in the present day Indian organizations and Indian business men. We come across various instances when the organization is doing well and the employer is able to earn higher amount of money, he does not mind paying higher wages to his workers and in times of losses, he tries to minimise the expenses on labour.
Further, the business man always keeps in mind the total quantum of wages to be paid to the labour out of the total cost of production, say 2 to 5 percent and as soon as the wage bill goes up, he would try to cut down the same.
Thus, the theory of Adam Smith has some relevance to the extent that the business man does control the wages to match the resources available with him.
This is however, not only basis for the decision of the business man; there are other factors also which have been discussed below:
3. Subsistence Theory:
This theory is based on the assumption that the size of the labour force should remain constant and for this purpose it states that, “labourers are paid to enable them to subsist and perpetuate the race without increase or diminution”.
The author of this theory, David Ricardo, believed that if the workers were paid higher wages, the number of workers would increase and this increase would result in lower wages. The lower rate of wages would in turn, bring down the number of workers available to work.
This phenomenon we observe even today in the industry and in the employment market. When there is shortage of manpower in a particular discipline, the wages paid are higher. When the wages paid are higher in a particular vocation, many people start preparing themselves for the same.
When the large number of workers are available in the same vocation, the organizations reduce the wages. The best example in this case is that of Computer Programmers. When the computers came to India for the first time in sixties, the Computer Programmers were very rarely available and they were paid very high wages – they could get anything between Rs. 2500/ – to Rs. 3000/- per month, whereas the wages of a University Lecturer were Rs. 600/- to Rs. 700/ – per month.
As a result, many started learning computer programming and see the situation today, when the same Computer programmer is available for much less wages than that of a University Lecturer.
Therefore, this theory can also said to have some relevance for the present day industry.
4. Surplus Value Theory:
The contribution to Wage theories of Karl Marx is very significant. According, to him worker was a commodity which could be purchased at a very low cost. The industrialist or the Capitalist could save by not paying adequately to the workers. The savings generated thus by the capitalists were utilised for meeting their own expenses. In other words, the capitalist would exploit the workers by paying them less than what is due to them in lieu of time and efforts spent by them on the job.
This may not be happening in large organizations today as the work force has become conscious of their rights and are aware of the prevailing market rates. In addition, the Government has stepped in a big way to protect the interests of the workers through labour legislation.
However, we hear occasionally about the exploitation of the workers by the employers in case of unorganised sector, where the workers are not paid even their minimum wages as prescribed by the Government or are denied the benefits required to be given by the employers.
The case of Bonded Labour is a glaring example of the exploitation of the labour. However, we must add that the Government and social organizations are working hard to eliminate the exploitation of labour. In case of large and organised sector, such instances not heard.
5. Marginal Productivity Theory:
This theory assumes that the wages are dependent upon the demand for, and supply of, labour. The wages are thus determined on the basis of the supply and demand of the workers and the contribution being made by them should be economically useful.
The owner or the promoter of the factory or the organization is able to keep part of the contribution by the labour, with himself. He does not pay the wages or does not employ any additional labourer the moment, he finds that it does not pay to hire any additional labour.
Further, the moment the employer finds that the labour is becoming uneconomical; he would like to deploy better technology and or go for automation. In simple terms, the employer uses labour as long as it is contributing to the earnings of the organization and the moment he finds that it is not contributing, he stops hiring them.
This theory owes its origin to Philips Henry Wicksteed and John Bates Clark. This theory has relevance for today’s organizations in the sense that the management does not want to employ labour if it is not economical and is anxious to replace the labour with machine wherever he could.
6. The Bargaining Theory:
According to this theory, the wages of the workers are determined by the bargaining strength of the workers unions and the employers or their associations. In case the union is strong enough to make the organization come to standstill and force the employers to meet their demands.
In case the employer is strong, he is able to force the unions to give up their demands. We come across numerous instances where the wages are determined on this basis in the organizations. The recent example is the strike by the Nurses of the Government Hospitals, they could get their demands met from the Government and resulted in increase in their wages to the extent of Rs. 2000/- or more per month.
This theory stands in the name of John Davidson.
7. Behavioural Theories:
The behavioural scientists have been working to determine the factors which motivate the workers to give higher productivity and in this context the role of wages is very important. At the same time, the wages at times take back seat when the worker joins an organization for the reputation it enjoys in the market.
At other times, the worker may take up a job which enjoys greater social prestige than a job which gives higher wages.
However, the role money plays in motivating employees cannot be denied. It has been observed that even employees at senior levels are also attracted by the salary and the corresponding perquisites attached to that job. It is money that provides the individual with the necessities required by him to meet his various needs including ego/status.
Thus, the employers try to attract the employees whom they require for their organizations through better wages and salaries. At the same time they also create many other attractions in the organizations which could attract the employees at lesser wages.
Employee Compensation – Types: Direct Compensation and Indirect Compensation
Compensation is one of the most important human resource functions in an organization. For many organizations, compensation is the biggest single cost of doing business. An organization’s compensation system can help to reinforce the key corporate values and facilitate the achievement of organizational objective.
The total compensation package may be described in many ways, but is basically classified into various types.
(i) Base Pay:
It is the first component of executive remuneration. It is determined through job evaluation i.e., according to level of skill, effort and responsibility required to perform the jobs and the severity of the working conditions. Because paying a wage is a standard practice, the competitive advantage can only come by paying a higher amount.
It is mainly a gift given occasionally to reward exceptional performance or for special occasions. It plays an important role in today’s competitive executive payment program. Bonuses can show an employer appreciating his/her employees and ensure that good performance or special events are rewarded. This type of incentive is usually short-term (annual) and is based on performance or profit sharing.
New English Dictionary defines Bonus as, a boon or gift over and above what is normally due as remuneration to the receiver and which is therefore, something wholly to be good.
There are basically four types of bonuses namely:
(a) Production bonus,
(b) Bonus as an implied term of contract between the parties,
(c) Customary bonus in connection with some festival, and
(d) Profit bonus.
Profit bonus has been given statutory recognition in the Payment of Bonus Act. Under this, the quantum of bonus depends on the extent of profit obtained in the relevant year. Executives deserve bonus because they have much more opportunity to influence organizational success than non-managerial staff.
(iii) Long-Term Incentives or Stock Options:
It is defined as a right to buy a piece of the business, which may be given to an employee to reward excellent service. If bonus constitutes short- term benefit, stock options are long-term benefits offered to executives.
An executive is given the right to purchase the company’s share at a fixed price. Stock option is valuable as long as the price of share keeps increasing. An employee, who owns a share of the business, or just a few acres, is far more likely to go an extra mile for the operation.
(iv) Perks or Perquisites:
Perks constitute a major source of income for executives. In addition, to the normally allowed perks like provident fund, gratuity executives enjoy perks such as vacation travel, membership in club and well-furnished houses. In many cases, companies take care of servants, telephone bills and even car fuel.
While monetary incentives often appear as important motivators, many factors unrelated to money can also serve as, “attention-getters” and “encouragers of action”. The classification of such non-financial incentives tends to a source of desirable ‘things’ that are potentially at disposal of the organization.
The creation of such rewards is only limited by manager’s ingenuity and ability to assess payroll’s that individuals within the organization find desirable and which are within the manager’s jurisdiction.
In a tight labour market, indirect compensation becomes increasingly important. Businesses that cannot compete with high cash wages can offer very individualized alternatives that meet the needs of the employee.
Some of the indirect compensation alternatives are:
(i) Flexible working schedules.
(ii) Elder care
(iii) Retirement programs
(iv) Moving expenses
(v) Insurance (health, eye, dental)
(vi) Subsidized housing
(vii) Paid leaves (sick/holiday/personal days)
(viii) Subsidized utilities
(ix) Tickets to events (ball games, concerts)
(x) Magazines subscriptions
(xi) Boots and clothing
(xii) Laundry services
(xiii) Company parties
(xiv) Use of machinery, farm produce goods/meals
(xv) Cellular phones/pagers
(xvi) Child care.
Non-monetary benefits – These includes challenging job responsibilities, competent supervision, offer supportive leadership and management, comfortable working conditions etc.
Employee Compensation – Importance
Compensation represents by far the most important element in the employment relationship and is of equal interest to the employer, employee and government.
To the employer; because it represents a significant part of his cost, is increasingly important to his employee’s performance and to competitiveness and affects his ability to recruit and retain a labour force of quality.
To the employee; because it is fundamental to his standard of living and is a measure of the value of his services or performance.
To the government; because it affects the aspects of macroeconomics, stability such as employment, inflation, purchasing power and socio-economic development in general.
Compensation will be perceived by employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job description, salary ranges/structure and written procedures.
1. Job description – A critical component of both compensation and selection systems, job description define in writing the responsibilities, requirements, functions, duties, location, environment, conditions and other aspects of the job. Description may be developed for job individually or for entire families.
2. Job analysis – The procedure of analysing jobs from which job description is developed. Job analysis techniques include the use of interviews, questionnaires and observations.
3. Job evaluation – A system for comparing jobs for the purpose of determining compensation levels for individual jobs or job elements.
4. Pay structure – It is useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is predetermined through collective bargaining.
5. Salary surveys – Collections of salary and market data. It includes average salaries, inflation indicators, cost of living indicators and salary budget averages. Companies may purchase result of surveys conducted by salary vendors or may conduct their own salary surveys.
6. Policies and regulations – It includes fair policies of compensation, which is comprised of a system of components developed to maintain internal and external equity.
Employee Compensation – International Compensation (With Benefits)
In recent years, globalization, the rapid growth of emerging markets, and the need to develop employees for management in global organizations have necessitated the movement of managers from one continent to the other. This may take different shapes such as a short-term assignment or a long- term one.
An overseas training programme, for example, might extend for a period of one year, whereas taking up assignments or projects might involve a long-term assignment. Decisions have to be made as to how much an expatriate has to be paid to be retained and sufficiently motivated.
Managing an increasing number of people from developed as well as developing countries at different stages of their careers makes it difficult to have a single remuneration system. It is well known that the cost of sending an employee abroad far exceeds the salary outlay.
In addition, the company must also consider air fares for the employee as well as his or her family apart from accommodation costs, relocation expenses, language training, school fees, and so on.
There are instances when expatriates have failed in their assignments. The failures may mainly be attributed to adjustment or relocation problems faced by the employee or his or her spouse. Adapting to a different culture is time consuming and often leads to failures. Such failures prove costly to the management.
A pre-assignment trip to the host location to allow the expatriate and any accompanying family members is desirable. They can then decide whether they can live in the host location and adjust to the cultural patterns. Usually language tuitions and independent financial counselling are also arranged for the expatriates.
The salary of an expatriate usually begins at the home-based one. Another criterion is to take the local market rate into consideration.
Apart from this, several other factors also operate, such as:
i. Reason for the assignment ( managerial, developmental, skill based),
ii. Nationality of expatriates, and developing countries to which they are sent, and
iii. Duration of the assignment.
Apart from salary, special allowances are also paid to cover cost of living relocation, and so on. In some instances, a hardship allowance is also paid in recognition of potential discomfort and difficulty in the host country, such as extremes of climate, health hazards, poor communications, and so on. This allowance is usually built into the salary itself so that the package is made attractive.
There are a number of allowances which are offered in the name of benefits. Housing allowances are sometimes built into the package or are paid separately. Some employers provide free accommodation while others provide an allowance.
Allowances on certain utilities, such as electricity, water, gas, etc., are also provided in some countries. However, there is a ceiling in terms of their usage to prevent extravagance. A car allowance is yet another common benefit which is provided to expatriates. Such an allowance may be provided in terms of money, or, alternatively, a car belonging to the company may be provided.
The usage and practice varies from city to city and from continent to continent. Most companies usually pay for the children of expatriates to be educated in the host country. Club membership fees and subscriptions are usually paid for by an expatriate’s employer if there is a good business case.
The social environment is seen as an important part of the ‘setting-in’ process as well as a useful source of business contacts, particularly in developing countries. In some cases, companies pay for the expatriate and his family to visit their home country once in a year or once in two years. There are variations in this practice. Apart from this, pensions and health insurances of expatriates are also taken care of.