Compensation refers to a wide range of financial & non-financial rewards to employees for their services rendered to the organization. OR Employee Compensation refers to all forms of pay going to employees & arising from their employment. It has 2 main components, Direct Financial payments ( Wages, salaries, incentives, conveyance, HRA, LTA, commissions & bonus), & Indirect Financial payments ( Financial benefits like employer paid insurance, Car Policy, Holiday Homes, Hospitalization, Leave Policy, Retirement Policy etc).
Elements of Compensation:-
- Monthly wage & Salary or total pay including basic wage, house rent allowance, Dearness Allowance & city compensatory allowance;
- Monthly wage & Salary or total pay including basic wage, house rent allowance, Dearness Allowance & city compensatory allowance;
- Bonus at the end of the year;
- Economic benefits such as paid holidays, LTA concession;
- Contribution towards insurance premium;
- Contribution towards retirement benefits such as employee provident fund;
- Transport & Medical Facilities.
- Economic benefits such as paid holidays, LTA concession;
- Contribution towards insurance premium;
- Contribution towards retirement benefits such as employee provident fund;
- Transport & Medical Facilities.
Compensation Objectives:-
- To reward employees’ past performance fairly, in line with efforts, skills and competencies;
- To reward employees’ past performance fairly, in line with efforts, skills and competencies;
- To attract and retain competitive high performing employees;
- To remain competitive in the labour market;
- To align employees’ future performance with organizational goals;
- To communicate the employees their worth to the organization;
- To motivate the high performing employees;
- To provide employee social status.
- To remain competitive in the labour market;
- To align employees’ future performance with organizational goals;
- To communicate the employees their worth to the organization;
- To motivate the high performing employees;
- To provide employee social status.
Theories Of Remuneration:
- Reinforcement & Expectancy Theory:- The Reinforcement theory postulates that a behaviour which has a rewarding experience is likely to be repeated. The implication for remuneration is that high employee performance followed by a monetary reward will make future employee performance more likely. In same way, a high performance not followed by a reward will make its recurrence unlikely in future. Vroom’s Expectancy theory focuses on the link between rewards & behaviour.
- Equity Theory:- Adam’s equity theory posit that employees perceptions of how they are treated by their firm is of prime importance to them. The dictum ‘a fair day work for fair day pay’ denotes a sense of equity felt by employees. When employees perceive inequity, it can result in lower productivity, higher absenteeism or increase in turnover. The remuneration system needs to meet 3 types of equity- internal, external & individual.
- Reinforcement & Expectancy Theory:- The Reinforcement theory postulates that a behaviour which has a rewarding experience is likely to be repeated. The implication for remuneration is that high employee performance followed by a monetary reward will make future employee performance more likely. In same way, a high performance not followed by a reward will make its recurrence unlikely in future. Vroom’s Expectancy theory focuses on the link between rewards & behaviour.
- Equity Theory:- Adam’s equity theory posit that employees perceptions of how they are treated by their firm is of prime importance to them. The dictum ‘a fair day work for fair day pay’ denotes a sense of equity felt by employees. When employees perceive inequity, it can result in lower productivity, higher absenteeism or increase in turnover. The remuneration system needs to meet 3 types of equity- internal, external & individual.
1. Internal Equity: Involves the perceived fairness of pay differentials among different jobs within an organization. Employees should feel that the pay differentials among jobs are fair, given the corresponding differences in job responsibilities;
2. External Equity: Involves employees perception of the fairness of their remuneration relative to those outside the organization. What competitors pay to similar jobs will have its impact on employee motivation, commitment & Performance;
3. Individual Equity: Considers employee perception of pay differentials among individuals who hold identical jobs in the same organization. Seniority contributes to differences in remuneration received by 2 individuals in the same cadre.
- Agency Theory:- The Agency Theory focuses on the divergent interests & goals of the organization’s stakeholders & the way the employee remuneration can be used to align these interests & goals. Employers & Employees are the 2 main stakeholders in an organization. Employers assume the role of principals & employees play the role of agents. It is natural that the employees expect high agency costs while the employers seek to minimize it. The agency theory says that the principal must choose a contracting scheme that helps align the interest of the agents with the principal’s own interests. It can be behaviour oriented ( Merit Pay ) OR Outcome oriented ( E.g. Profit Sharing, ESOP, Commissions etc.)
Factors Affecting Wage/Compensation:
- External Factors:-
1. Demand & Supply of Labour: Demand & Supply of Labour influence wage & salary fixation. A low wage may be fixed when the supply of labour exceeds the demand for it. A higher wage will have to be paid when the demand exceeds supply, as in the case of skilled worker. High remuneration to skilled labour is necessary to attract & retain it.
2. Productivity of Workers: Productivity of labour also influences wage fixation. Productivity can arise due to increased effort of the worker or as a result of the factors beyond the control of the worker such as improved technology, machines, equipment & better management. Higher productivity will automatically fetch more profit to the firm, where in turn workers will be paid high wages in comparison to other firms with low productivity.
1. Demand & Supply of Labour: Demand & Supply of Labour influence wage & salary fixation. A low wage may be fixed when the supply of labour exceeds the demand for it. A higher wage will have to be paid when the demand exceeds supply, as in the case of skilled worker. High remuneration to skilled labour is necessary to attract & retain it.
2. Productivity of Workers: Productivity of labour also influences wage fixation. Productivity can arise due to increased effort of the worker or as a result of the factors beyond the control of the worker such as improved technology, machines, equipment & better management. Higher productivity will automatically fetch more profit to the firm, where in turn workers will be paid high wages in comparison to other firms with low productivity.
3. Cost of Living: This criteria matters during periods of rising prices, & is forgotten when prices are stable or falling. The justification for cost of living as a criterion for wage fixation is that the real wages of workers should not be allowed to be reduced down by price increases. A rise in the cost of living is sought to be compensated by payment of dearness allowance, basic pay to remain undisturbed.
4. Labour Unions: The presence & absence of labour organizations often determine the quantum of wages paid to employees. Employers in non-unionized factories enjoy the freedom to fix wages & salaries as they please. Because of large-scale unemployment, these employers hire workers at little or even less than legal minimum wages. The employees of strongly unionized companies too, have no freedom in wage & salary fixation, as they are forced by the pressure of labour representatives in determining & revising pay scales.
4. Labour Unions: The presence & absence of labour organizations often determine the quantum of wages paid to employees. Employers in non-unionized factories enjoy the freedom to fix wages & salaries as they please. Because of large-scale unemployment, these employers hire workers at little or even less than legal minimum wages. The employees of strongly unionized companies too, have no freedom in wage & salary fixation, as they are forced by the pressure of labour representatives in determining & revising pay scales.
5. Government: To protect the working class from the exploitation of powerful employers, the Government has enacted several laws. Laws on minimum wages, hours of work, equal pay for equal work, payment of dearness allowances, payment of bonus etc have been enacted & enforced to bring about a measure of fairness in compensating the working class.
6. Society: Remuneration paid to employees is reflected in the prices fixed by an organization for its goods & services. For this reason the consuming public is interested in remuneration decision.
7. The Economy: The last external factor that has its impact on wage & salary fixation is the state of the economy. For E.g. A Depressed Economy will probably increase the labour supply, which in turn should serve to lowering the going wage rate.
6. Society: Remuneration paid to employees is reflected in the prices fixed by an organization for its goods & services. For this reason the consuming public is interested in remuneration decision.
7. The Economy: The last external factor that has its impact on wage & salary fixation is the state of the economy. For E.g. A Depressed Economy will probably increase the labour supply, which in turn should serve to lowering the going wage rate.
Internal Factors:
1. Business Strategy: The overall strategy which a company pursues should determine the remuneration to its employees. Where the strategy of the enterprise is to achieve rapid growth, remuneration should be higher than what competitors pay. Where the strategy is to maintain & protect current earnings, because of the declining fortunes of the company, remuneration level needs to be average or even below average.
2. Job Evaluation & Performance Appraisal: Job evaluation helps establish satisfactory wage differentials among jobs. Performance Appraisal helps award pay increases to employees who show improved performance.
3. The Employee: Several employee related factors interact to determine his or her remuneration. These are Performance, Seniority, experience, potential & Luck.
1. Business Strategy: The overall strategy which a company pursues should determine the remuneration to its employees. Where the strategy of the enterprise is to achieve rapid growth, remuneration should be higher than what competitors pay. Where the strategy is to maintain & protect current earnings, because of the declining fortunes of the company, remuneration level needs to be average or even below average.
2. Job Evaluation & Performance Appraisal: Job evaluation helps establish satisfactory wage differentials among jobs. Performance Appraisal helps award pay increases to employees who show improved performance.
3. The Employee: Several employee related factors interact to determine his or her remuneration. These are Performance, Seniority, experience, potential & Luck.
Challenges of Remuneration:
- Skill based pay: In the traditional job based pay employees are paid on the basis of job they do. In the skill based system workers are paid on the basis of number of jobs they are capable of doing, or on the depth of knowledge. The purpose of the this system is to motivate employees to acquire additional skills so that they become more useful to the organization. ( Pay for performance/ Pay for seniority);
- Pay Reviews: Pay once determined should not remain constant. It must be reviewed & changed often, but how often becomes a relevant question. Pay reviews may be made on predetermined dates, anniversary dates or there could be flexible reviews.
- Pay Secrecy: Just how much & what types of information about pay should be provided to employees is a question that troubles HR managers. The tendency among most firms is to maintain pay secrecy as this would help avoid pay comparisons likely to me made by employees.
- Pay Secrecy: Just how much & what types of information about pay should be provided to employees is a question that troubles HR managers. The tendency among most firms is to maintain pay secrecy as this would help avoid pay comparisons likely to me made by employees.
- Monetary versus Non-monetary Rewards:
The issue relating to monetary & non-monetary rewards has primarily tax implications. Many non-monetary rewards such as medical benefits & housing are fully or partially exempted from taxes. Employees & even employers prefer non-monetary benefits than monetary rewards.
- Eliticism & Egalitarianism: Firms become egalitarian when they place most of their employees under the same remuneration plan. The plan becomes elitist when the organizations establish different remuneration schemes. E.g. In some firms only the CEO is eligible for stock options. In others, even the lowest paid workers are offered stock options.
- Salary compression: A salary inequity problem, generally caused by inflation, resulting in longer-term employees in a position earning less than workers entering the firm today.
- The pay cycle, Salary increases and promotions, Overtime and shift pay, Probationary pay, Paid and unpaid leaves, Geography, Equity & its impact on Pay Rates.
- Salary compression: A salary inequity problem, generally caused by inflation, resulting in longer-term employees in a position earning less than workers entering the firm today.
- The pay cycle, Salary increases and promotions, Overtime and shift pay, Probationary pay, Paid and unpaid leaves, Geography, Equity & its impact on Pay Rates.
Methods to Address Equity Issues/ Establishing Pay Rates:
- Salary Survey: It is difficult to set pay rates if you don’t know what others are paying, so salary surveys- surveys of what others are paying play a big role in pricing jobs. It is aimed at determining prevailing wage rates. Virtually every employer conducts at least an informal telephone, newspaper, or Internet Salary survey. Many Employers use surveys published by Consulting Firms, Governmental Agencies, etc. Employers use survey data to price benchmark jobs. Salary surveys can be formal or informal way. It is mostly to get information of employees, overtime policies, starting salaries, sick leave, insurance & paid vacations.
- Job Evaluation: Job Evaluation is a systematic process of analyzing & evaluating jobs to determine the relative worth of each job in an organization. Once the worth of jobs is determined, it becomes easier to fix the wage structure that will be fair & equitable. The basic procedure is to compare the jobs in relation to one another- For E.g. in terms of required effort, responsibility, & skills.- Salary Survey: It is difficult to set pay rates if you don’t know what others are paying, so salary surveys- surveys of what others are paying play a big role in pricing jobs. It is aimed at determining prevailing wage rates. Virtually every employer conducts at least an informal telephone, newspaper, or Internet Salary survey. Many Employers use surveys published by Consulting Firms, Governmental Agencies, etc. Employers use survey data to price benchmark jobs. Salary surveys can be formal or informal way. It is mostly to get information of employees, overtime policies, starting salaries, sick leave, insurance & paid vacations.
Objectives:-
1. Maintenance of consistent wage policy;
2. Enable management to gauge & control its payroll costs more accurately;
3. Provide a framework for periodic review of wage & salaries;
4. To manage internal & external consistency in the compensation
5. Reduce grievances & labour turnover & thereby, increase employee morale & improve management-employee relationship;
Techniques of Job Evaluation:
1. Ranking Method: Ranking is one of the simplest & the oldest job evaluation methods. In this method, the jobs in an organization are assessed based on the knowledge, skills, effort & other job dimensions associated with each job. Jobs also can be arranged according to the relative difficulty in performing them.
Ranking involves preparation of brief job descriptions & assigning ranks to the jobs in accordance with their worth in the organization.
3. Point rating Method: The point method or point rating method is one of the most widely used methods of job evaluation. In this method, a point scale is developed to evaluate the jobs. However, different scales might be required to evaluate different jobs. For E.g. all the managerial jobs might be evaluated on one scale, all the operational on another & the clerical jobs on one scale etc.
4. Factor Comparison Method: Here they determine & define the specific factors like mental requirements, skills, physical requirements, responsibilities, working conditions etc. Next they will identify the key jobs or benchmark jobs, which are well known & have an established pay rate in the organization. The factors in each benchmark job are compared & ranked based on their relative importance.
Process Of Job Evaluation:
- Preparation of a Job Evaluation Plan: The need for job evaluation is determined & detailed plan of how to go about the whole exercise, including the method to be adopted, is prepared;
- Job Analysis: Job Analysis provides the basic information for job evaluation. Job Analysis helps in understanding the tasks & responsibilities associated with a job.
1. Maintenance of consistent wage policy;
2. Enable management to gauge & control its payroll costs more accurately;
3. Provide a framework for periodic review of wage & salaries;
4. To manage internal & external consistency in the compensation
5. Reduce grievances & labour turnover & thereby, increase employee morale & improve management-employee relationship;
6. Serve as a basis for negotiation with the union.
Techniques of Job Evaluation:
1. Ranking Method: Ranking is one of the simplest & the oldest job evaluation methods. In this method, the jobs in an organization are assessed based on the knowledge, skills, effort & other job dimensions associated with each job. Jobs also can be arranged according to the relative difficulty in performing them.
Ranking involves preparation of brief job descriptions & assigning ranks to the jobs in accordance with their worth in the organization.
2. Job classification/ Job Grading: In this method the jobs are classified & graded based on their significance & their worth to the organization. The jobs at various levels in an organization are placed under different grades, which are clearly defined. Grades are formulated on the basis of the nature of tasks & responsibilities of the jobs, the authority associated with them & the knowledge & skill required for the jobs.
3. Point rating Method: The point method or point rating method is one of the most widely used methods of job evaluation. In this method, a point scale is developed to evaluate the jobs. However, different scales might be required to evaluate different jobs. For E.g. all the managerial jobs might be evaluated on one scale, all the operational on another & the clerical jobs on one scale etc.
4. Factor Comparison Method: Here they determine & define the specific factors like mental requirements, skills, physical requirements, responsibilities, working conditions etc. Next they will identify the key jobs or benchmark jobs, which are well known & have an established pay rate in the organization. The factors in each benchmark job are compared & ranked based on their relative importance.
Process Of Job Evaluation:
- Preparation of a Job Evaluation Plan: The need for job evaluation is determined & detailed plan of how to go about the whole exercise, including the method to be adopted, is prepared;
- Job Analysis: Job Analysis provides the basic information for job evaluation. Job Analysis helps in understanding the tasks & responsibilities associated with a job.
- Job Description & Job Specification:
- Selection of Job Dimensions: The different factors which will be the basis for evaluating each job, have to be determined. Once these dimensions are selected, monetary values have to be attached to each of these jobs, as it is a reflection of its contribution to the organization & its significance.
- Implementation of the evaluation: The employees should be educated about the program to make them understand the basis & the procedure of job evaluation.
- Maintenance: The results of job evaluation have to be updated from time to time to match the changing organizational needs.
- Group Similar Jobs into Pay Grades: Once the committee has used job evaluation to determine the relative worth of each job, it can turn to the task of assigning pay rates to each job, however, it will usually want to first group jobs into pay grades. The committee will probably group similar jobs into grades for pay purposes. So, instead of having to deal with hundreds of pay rates, it might only have to focus on e.g. 10 or 12. A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.
- Price Each Pay Grade– Wage Curves: The next step is to assign pay rates to your pay grades. Wage curve can be used to help assign pay rates to each pay grade or to each job. The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. The purpose of wage curve is to show the relationships between (1) the value of the job as determined by one of the job evaluation methods & (2) the current average pay rates for your grades.
- Fine tune Pay Rates:-
It Involves (1) Developing Pay rates & (2) Correcting out of line rates.
1. Developing Pay Rates: Most employers do not pay just one pay rate for all jobs in a particular grade. For E.g. GE Medical wont want to pay all its accounting clerks, from beginners to long tenure, at the same rate. Instead, employers develop vertical pay ranges for each of the pay grades. These pay ranges are a series of steps or levels within a pay grade, usually based upon years of service. These pay ranges lets the employer take a more flexible stance in the labour market. It also let companies provide for performance differences between employees within the same grade or between those with different seniorities.
2. Correcting Out-of-Line Rates: The wage rate for a particular job may now fall well off the wage line or well outside the rate range for its grade. This means that the average pay for that job is currently too high or too low, relative to other jobs in the firm. For underpaid jobs, the solution is clear, raise the wage of underpaid employees to the minimum of the rate range for their pay grade.
Pricing Managerial & Professional Jobs:
Developing compensation plans for managers or professionals is similar in many respects to developing plans for any employee. The basic aim is the same i.e. to attract & keep good employees, & in job evaluation- classifying jobs, ranking them or assigning points to them is applicable to managerial & professional jobs. Compensation for a company’s top executives usually consist of 4 main elements. Base Pay- Includes the person’s fixed salary as well as often guaranteed bonuses such as 10% of pay at the end of quarter, regardless of whether or not the company makes profit.
What Determines Executive Pay?
- Company Size;
- Company Performance;
- Business Strategy;
- Corporate Trends;
- Complexity & Unpredictability of the decisions they make.
Elements of Executive Pay:
- Selection of Job Dimensions: The different factors which will be the basis for evaluating each job, have to be determined. Once these dimensions are selected, monetary values have to be attached to each of these jobs, as it is a reflection of its contribution to the organization & its significance.
- Implementation of the evaluation: The employees should be educated about the program to make them understand the basis & the procedure of job evaluation.
- Maintenance: The results of job evaluation have to be updated from time to time to match the changing organizational needs.
- Group Similar Jobs into Pay Grades: Once the committee has used job evaluation to determine the relative worth of each job, it can turn to the task of assigning pay rates to each job, however, it will usually want to first group jobs into pay grades. The committee will probably group similar jobs into grades for pay purposes. So, instead of having to deal with hundreds of pay rates, it might only have to focus on e.g. 10 or 12. A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.
- Price Each Pay Grade– Wage Curves: The next step is to assign pay rates to your pay grades. Wage curve can be used to help assign pay rates to each pay grade or to each job. The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. The purpose of wage curve is to show the relationships between (1) the value of the job as determined by one of the job evaluation methods & (2) the current average pay rates for your grades.
- Fine tune Pay Rates:-
It Involves (1) Developing Pay rates & (2) Correcting out of line rates.
1. Developing Pay Rates: Most employers do not pay just one pay rate for all jobs in a particular grade. For E.g. GE Medical wont want to pay all its accounting clerks, from beginners to long tenure, at the same rate. Instead, employers develop vertical pay ranges for each of the pay grades. These pay ranges are a series of steps or levels within a pay grade, usually based upon years of service. These pay ranges lets the employer take a more flexible stance in the labour market. It also let companies provide for performance differences between employees within the same grade or between those with different seniorities.
2. Correcting Out-of-Line Rates: The wage rate for a particular job may now fall well off the wage line or well outside the rate range for its grade. This means that the average pay for that job is currently too high or too low, relative to other jobs in the firm. For underpaid jobs, the solution is clear, raise the wage of underpaid employees to the minimum of the rate range for their pay grade.
Pricing Managerial & Professional Jobs:
Developing compensation plans for managers or professionals is similar in many respects to developing plans for any employee. The basic aim is the same i.e. to attract & keep good employees, & in job evaluation- classifying jobs, ranking them or assigning points to them is applicable to managerial & professional jobs. Compensation for a company’s top executives usually consist of 4 main elements. Base Pay- Includes the person’s fixed salary as well as often guaranteed bonuses such as 10% of pay at the end of quarter, regardless of whether or not the company makes profit.
Short term incentives- Are usually cash or stock bonuses for achieving short-term goals, such as year-to-year increases in sales revenue. Long term incentives aim to encourage the executive to take actions that drive up the value of the company’s stock. Executive benefits & perks might include supplemental executive pension plans, supplemental life insurance & health insurance without a deductible.
- Company Size;
- Company Performance;
- Business Strategy;
- Corporate Trends;
- Complexity & Unpredictability of the decisions they make.
Elements of Executive Pay:
Salary is traditionally the cornerstone of executive compensation; it is the element on which employers layer benefits, incentives, & perquisites- all normally conferred in proportion to base pay. Executive compensation emphasizes performance incentives more than do other employees pay plans, since organizational results are likely to reflect executives contributions more directly than lower-level employees. Boards are boosting the emphasis on performance based pay.
Compensating Professional Employees:
Competency Based Pay:
Competency Based Pay means the company pays for the employee’s range, depth, & types of skills & knowledge, rather than for the job title he or she holds. Experts variously call this competence- knowledge or skill-based pay. With competency based pay, an employee in a class-I job who could do class II work gets paid as a class II worker, not a class I. Competencies are demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance. Pay for knowledge pay plans reward employees for learning organizationally relevant knowledge- for instance Microsoft pays new programmers more as they learn the intricacies of Windows Vista. Skill-based pay tends to be used more for workers with manual jobs- thus carpenters earn more as they become more proficient at finishing cabinets.
Professional Employees are those whose work involves the application of learned knowledge to the solution of the employers problems. Compensating Professional employees like engineers & scientists presents unique problems. Analytical jobs like these emphasize creativity, problem solving, & compensable factors not easily compared or measured. Employers can also use job evaluation for professional jobs. Compensable factors here tend to focus on problem solving, creativity, technical knowledge & expertise.
Competency Based Pay means the company pays for the employee’s range, depth, & types of skills & knowledge, rather than for the job title he or she holds. Experts variously call this competence- knowledge or skill-based pay. With competency based pay, an employee in a class-I job who could do class II work gets paid as a class II worker, not a class I. Competencies are demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance. Pay for knowledge pay plans reward employees for learning organizationally relevant knowledge- for instance Microsoft pays new programmers more as they learn the intricacies of Windows Vista. Skill-based pay tends to be used more for workers with manual jobs- thus carpenters earn more as they become more proficient at finishing cabinets.
Why Use Competency Based Pay?
- Support High-Performance Work system: ( Encourage employees to work self-motivated way, organizing work around teams, pushing more responsibility for things etc)
- Support Strategic Aims: ( Paying for skills, knowledge & competencies is more strategic )
- A system that defines specific skills, and a process for tying the person’s pay to his or her skill
- A training system that lets employees seek and acquire skills
- A formal competency testing system
Pros:-
- Higher quality;
- High productivity;
- Higher Growth;
- High Motivations;
- Higher job Satisfaction;
- Healthy Competition.
Cons:-
- Implementation problems;
- The cost implications of paying employees for knowledge, skills & behaviours even if they are not used;
- Complexity of program –systems and evaluations and assessment;
- Uncertainty that the program improves productivity.
Concepts of Wages:
Various forms of wage & salary policies have been developed, differing according to such factors as the nature of the business its location, needs of the workers, capacity of the employee to pay, & general economic conditions prevailing in a country.
- Wage Policies should be clearly expressed in writing to ensure Uniformity & Stability;
- Management should see to it that the employees know & understand the wage policies;
- Wage policies should be evaluated from time to time to make certain that they are adequate for current needs;
- Matching Employee Expectations;
- Reinforcing positive employee behaviour & contribution to the organization;
- Support High-Performance Work system: ( Encourage employees to work self-motivated way, organizing work around teams, pushing more responsibility for things etc)
- Support Strategic Aims: ( Paying for skills, knowledge & competencies is more strategic )
- Support Performance Management: Performance management means aligning employees goals, training, appraisals & rewards so that they support the company’s strategic goals. There is not much a manager can do to “manage” the employee’s job duties. So, paying for competencies rather than duties gives the employer more control over managing the employee’s performance.
Competency Based Pay in Practice:
In practice, skill/competency/knowledge-based pay programs generally contain 4 main elements:-- A system that defines specific skills, and a process for tying the person’s pay to his or her skill
- A training system that lets employees seek and acquire skills
- A formal competency testing system
- A work design that lets employees move among jobs to permit work assignment flexibility.
Competency Based Pay:Pros:-
- Higher quality;
- High productivity;
- Higher Growth;
- High Motivations;
- Higher job Satisfaction;
- Healthy Competition.
Cons:-
- Implementation problems;
- The cost implications of paying employees for knowledge, skills & behaviours even if they are not used;
- Complexity of program –systems and evaluations and assessment;
- Uncertainty that the program improves productivity.
Concepts of Wages:
Various forms of wage & salary policies have been developed, differing according to such factors as the nature of the business its location, needs of the workers, capacity of the employee to pay, & general economic conditions prevailing in a country.
- Minimum Wage:- “ A minimum wage is that wage which is sufficient to cover the bare physical needs of a worker and his family”. It was observed that the minimum wage must provide for the preservation of the efficiency of the worker. (education, medical requirements & amenities). It is the wage which has to be paid to the workers irrespective of the capacity of the industry to pay.
- Fair Wage:- Fair Wage is understood in 2 ways. In a narrow sense, wage is fair if it is equal to the rate prevailing in the same trade & in the neighbourhood for similar work. In a wider sense, it will be fair if it is equal to the predominant rate for similar work throughout the country & for the trades in general.- Living Wage:- Living Wage is a step higher than fair wage. Living Wage may be described as one which should enable the wage earner to provide for himself/herself & his/her family not only the bare essentials of like food, clothing, & shelter, but a measure of frugal comforts including education for children, protection against ill health, requirements of essential social needs, & measure of insurance against the more important misfortunes including old age.
Principles of Wage Administration:
- Wage Policies should be carefully developed, having in mind the interests of (a) Management as the representative of the owners (b) the employees, (c) the consumers (d) the community;- Wage Policies should be clearly expressed in writing to ensure Uniformity & Stability;
- Management should see to it that the employees know & understand the wage policies;
- Wage policies should be evaluated from time to time to make certain that they are adequate for current needs;
- Matching Employee Expectations;
- Reinforcing positive employee behaviour & contribution to the organization;
- Eliminating any discrepancies in wage administration in the organization.
Basic Wage Plans:
- Time Wage Plan: Under this system, the worker is paid for the amount of time spent on the job. This is the oldest & most common system & the wages are based on a certain period of time during the course of work. The period of time may be an hour, a day, a week etc & the wage rate will depend upon time fixed for wok is completed irrespective of output or completion of the work.- Piece Wage Plan: Under this system, the output of work is the basis of wage payment. A worker is paid according to the amount of work completed or the number of units turned out irrespective of time taken. Though the time is not essence in this system, it is assumed that the worker will not take more than average time to complete the job. The earnings of a worker depend upon the speed of his work & his own skill & efficiency.
- Skill base pay: Under this system, employees are compensated for their job related skills. This is also called knowledge based pay. Under a typical skill based system, companies hire employees at below-market rates. Once they gain extensive knowledge & new skills, they are promoted & rewarded with an increased pay.- Competency based pay: Competency can be defined as the knowledge, skills & behaviour of an individual that contribute to a worker’s performance. The competencies of the best performing employee are indentified & the employee is compensated for these competencies that he/she brings to the job.
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