Unit-4

Compensation Management and Employee Relations:

Introduction to compensation management, Components of employee and executive compensation,
Factors affecting employee compensation, Employee incentive schemes, and recent trends in
compensations management. Meaning and nature of employee relation and industrial relations.

Compensation:
Compensation is an activity of human resource management. It plays a significant role for the employees
as well as for the employer. For an employee compensation is the main source of livelihood and
determines his standard of living, status in the society, motivation, loyalty and productivity.
For an employer compensation is an instrument of attracting, maintaining, developing, promoting, and
motivating employees and getting effective results from them.
“Compensation refers to the whole financial and non-financial incentives or rewards received by an
employee in return for his services to the organization”.
Employee compensation is made up of the following components:
• Base/Primary Compensation
• Incentive compensation
• Fringe Benefits
 Non-financial Benefits
Base or Primary Compensation:
It refers to the basic pay in the form of wages, salaries and allowances. Wages represent hourly rate of
pay while salaries refer to the monthly rate of pay. Wages may be based on the number of units produced
or time spent on the job. Salary is always based on the time spent in the job. Wages and salary differ from
industry to industry, employee to employee; depend upon the job, seniority and merit. Allowances are
paid to employees to compensate for expenditure.
Differences between Wages and Salaries:
Basis Wages Salary
Basis of Payment Paid per hour/day/week Paid on monthly basis

Contact Base Not based on a contract Based on a contract

Type of workers Paid to manual workers (i.e. Paid to white caller workers,
blue-caller job) such as office employees,
supervisor, managers,
professionals, and technical staff

Type of works Manual work/Physical work Mental work

Incentive Compensation:
It refers to monetary compensation paid to employees for performance results-based either on individual
performance or performance of the group as a whole. It is paid in addition to wages and salaries and
depend upon productivity, sales, profits or cost reduction efforts.
Fringe Benefits:
Fringe benefits refer to those benefits and services that are extended to employees in the form of medical
care, subsidized food and transportation, paid holidays, group insurance, retirement benefits and the like.
These benefits are offered to retain employees as well as attract promising job applicants in the
organization.
Non-Financial Benefits:
These are benefits which provide psychological and emotional satisfaction to employees and relate to the
content and context of job—Challenging job responsibility, recognition of merit, comfortable working
condition, job sharing, flexible work schedule.
Objectives of Compensation:
Some of the common objectives of a sound compensation system include the following:
1. Attracting qualified personnel
2. Retaining existing competent employees
3. Rewarding desired behavior and maintaining motivational levels of employees
4. Maintaining salary equity among employees
5. Improving union-management relations
6. Improving public and professional image of the company.
7. Fixing wages and salary rates

Factors Affecting Employees Remuneration:

Employee remuneration and its structure is influenced by a variety of factors-some are related to and exist
within the organization (called internal factors) and others that exist outside the organization (called
external factors).
Internal Factors:
The various internal factors which have an impact on employee remuneration include the following:
1. Company’s Business Strategy:
For a business pursuing an aggressive strategy to achieve rapid growth, its remuneration will be higher
than what competitors pay.
2. Job’s worth:
Organization decides the worth of a job in two ways: formally, through a system of job evaluation or
informally through the opinion of people familiar with the job.
3. Employee Relative Worth:
An employee’s worth is determined by the efficiency with which he performs his job, his loyalty towards
the organization and his seniority in the organization.
4. Employer’s Ability to Pay:
Remuneration payable to workers also depend upon the paying ability of the employer which is a function
of the financial condition and profitability of a firm.
External Factors:
1. Labor Market Conditions:
Labor market reflects the forces of supply and demand of workers within the area. The forces help to
decide the pay rates.
2. Prevailing Area Wages Rates:
A formal wage structure should provide rates that are in line with those being paid by other employers for
comparable jobs within an area.
3. Cost of Living:
Since wages and salaries represent the only means livelihood to the employees, it is obvious that they
should be sufficiently meet the cost of living and should be kept in tune with the increasing cost of living.
4. Collective Bargaining Capacity:
Employee remuneration is also determined by the relative bargaining power of the employer and the labor
unions.
5. Government Laws and Regulations:
There are numerous labor laws at the Central and State levels, that affect employee’s remuneration.
Some of the acts are: Payment of Wages Act 1936; The Minimum wages Act1948; The payment of
Bonus Act1965.
Compensation Policy:
Administration of employee remuneration system is known as compensation administration or
management. It involves designing and implementing a cost-effective pay structure that will attract,
retain, and motivate competent employees in the organization.
Designing a compensation policy is a complex task and includes job evaluation, wages/salary survey,
development and maintenance of wages structure rules and control of pay rolls.

Major Issues in Compensation Policy:

Some of the major issues include
Internal and External Equity:
 An organization’s compensation policy must achieve as far as possible, internal and external
equity in its pay structure. Internal equity perceives the pay difference among jobs within the
organization. Employees should feel that the pay differential among jobs is fair.
 External equity involves employee’s perception of the fairness of their remuneration relative to
those outside the organization.
Balance between Financial and Non-financial Rewards:
 Employee compensation is made up of both financial as well as non-financial reward. Financial
rewards are more tangible while non-financial rewards like greater authority over work
assignment satisfy emotional and psychological needs of employees.
 In general companies that focuses on fast sales, individual achievement and responsibility, and
have more unskilled workforce give importance to the financial rewards.
 In contrast, companies that believe in nurturing long-term customer relationships, team work,
long term employee commitment, and have larger proportion of skilled and knowledge workers
place greater importance on non-financial rewards.
Linking Pay with Work Performance:
 While designing its compensation policy an organization has to thoughtfully decide whether
employees’ pay should be linked with their work performance or with the worth of the job. Both
the system find favors with organization depending upon their work settings.
 Companies operating in a competitive business environment tend to link compensation with
employee’s work performance.
 Linking pay with performance proves beneficial for the employee as well as the organization.
Desire to Lead or Just Meet Market Expectations:
 While designing the compensation plan, the management has to decide whether it wants to lead
the market or just wants to be at par with others.
 In general, if the company is competing on quality, innovation etc. it has to follow the policy of
leading the market by paying higher pay scales.
Social Concerns:
 Compensation policy cannot be conceived in isolation of community concerns.
 These concerns are price stability, improving standards of living generating more employment,
meeting demands of competitiveness to attract global business, social equity, harmony etc.
Features of a Good Compensation Policy:
To be effective the compensation policy of an organization must ensure the following:
 It should be easily understood by all categories of employees in the organization.
 It should be such that the employees are able to easily calculate their total remuneration including
monetary value of various components.
 The earning should be related to the efforts put in by the employees.
 The salary and incentive rewards should be paid as soon as possible.
 The compensation policy should be such that it is stable and does not change very frequently.
Incentive Schemes or Plans:
Besides wages and salaries, employees are paid incentives depending upon their performance. Any action
or program which includes workers to produce more is described as “incentive”, and remuneration
paid for increased output is known as “incentive wage”.

Requirements of a Sound Wage Incentive System:

A sound wage incentive system can be installed by management only when certain general principles or
guidelines are followed. Some of the important principles of sound wages systems:
Worker’s Participation:
Wage incentive system is installed primarily to benefit the person who will in any way be affected by its
installation. Therefore becomes important on the part of the management to discuss the wages incentive
system with them.
Simplicity:
The successful operation of a wages incentive system is based on the element of understandability and
simplicity.
Scientific and Fair Standards:
Since incentive system is adopted for standardized jobs, therefore techniques like motion study and work
study must be applied.
Prompt Payment:
An effective incentive system should provide for prompt payment of rewards for accomplishing the task.
Ceiling on Earnings:
Generally no upper limit should be placed on incentive earning. This is because more the workers
produces, more he earns and along with him more the firm would earn.
Grievance Mechanism:
An effective grievance mechanism must be available to handle dissatisfaction and complaints on the part
of employees.
Types of Incentive Plans:
A large number of wage incentive plans are used in the organization. They must be put into two
broad categories as follows:
 Individual Incentive Plans
 Group Incentive Plans
Individual Incentives Plan:
 Taylor’s Differential Piece Rate Plan
 Merrick’s Differential Piece Rate Plan
 Gantt Task Bonus Plan
 Halsey’s Premium Bonus Plan
 Rowan Premium Bonus Plan
 Bedaux Point Premium Plan
  Emerson Efficiency Bonus Plan
Group Incentive Plans:
 Priestman Bonus Plan
 Scanlon Plan

Individual Incentive Plans:

Taylor’s Differential Piece Rate Plan:
This system was introduced by Taylor with two objectives: first to give sufficient incentive to
induce them to produce up to their full capacity; and second to remove the fear of wage cut.
Taylor’s plan enables the employee to produce up to fulfill capacity. There is one rate for those
who reach the standard. The other is lower rate for those who are below the standard.
Merrick’s Multiple Piece Rate System:
This multiple price rate system too is based on the principle of a low price rate for a slow worker
and a higher piece rate for higher production. But the plan differs from Taylor’s plan, in that it
offers three graded pieces rates instead of two. Such a scheme is usually introduced in an
organization where the performance level is already high and management is aiming at 100
percentage efficiency.
Gantt Task and Bonus Plan:
This plan has been devised by H.L.Gantt and is the only one that pays a bonus percentage
multiplied by the value of standard time. Under this system fixed time rates are guaranteed.
Output standards and time standards are established for the performance of each job.
Workers completing the job within the standard time or in less time receive wages for the
standard time plus a bonus which ranges from 20 percent to 50 percent of the time allowed and
not time saved. When a worker fails to turn out the required quantity of a product he simply gets
his time rate without any bonus.

Halsey’s Premium Bonus Plan:

This plan was developed by F.A. Halsey. Under this plan standard time is fixed for the
completion of a job. The standard time is fixed on the basis of past performance record or time
study. On the basis of this wages rate per hour is determined. For each worker the guaranteed
base rate is assured. If a worker takes the standard time or more for the completion of a job, he is
paid at the time rate. If a worker takes the less than standard time the worker is paid for the
actual time worked plus a bonus on the time saved.
Rowan Premium Bonus Plan:
James Rowan of UK brought out this plan in 1898. Under this plan a minimum wage is
guaranteed to every worker. Standard time and rate per hour are also fixed for each job. If the
time taken to complete the job is equal to or exceeds the standard time the worker is paid for the
time taken at the rate per hour. If the time taken is less than the standard time a worker gets extra
bonus in addition to the time wages.
Bedaux Point Premium Plan:
This plan was developed by Charles E. Bedaux in 1911. Under this plan standard time for the job
is determined in terms of “minutes" and is called B. There are 60Bs hour. If a worker fails to
complete the job within the standard time or just finishes it within the standard time, he is paid
just the normal time wages. If he can complete the job in less than standard time, he receives
incentive bonus equal to the wages for the saved time. Incentive bonus is normally paid to the
workers @75percent of the saved time. Rest 25percent goes to supervisor.
Emerson Efficiency Bonus Plan:
Emerson brought out his efficiency plan in 1910. Under this plan standard time for the job is
determined scientifically and a minimum time wage is guaranteed to all workers. Efficiency of
each worker is determined by comparing (dividing the actual time taken with the standard time).
Up to 67percent efficiency wages are paid by time rate only. Bonus is given only when the
efficiency level goes beyond 67percent. As the worker efficiency increase his bonus also
increases.
Group Incentive Plans:
In some jobs operations are performed through group effort and it is not possible to ascertain the
exact contribution of an individual worker in the final output. In such cases group incentives
plans are used. Two main types of group incentive plans are: Priestman Bonus Plan and Scanlon
Plan.
Priestman Bonus Plan:
Under this plan a committee representing the management and the workers mutually sets the
standard the performance or task standard. This task standard is usually set in advance every
month. Then actual output of the group is compared with the standard output to decide about
incentive bonus. Group concerned gets a bonus only if actual output exceeds the predetermined
standard of performances. This plan also guarantees a minimum wages to each worker.
Scanlon Plan:
This plan is developed by Joseph N. Scanlon with the purpose of increasing productivity by
involving employees in reducing cost of operations and improving work methods. The plan
relates labour cost to the total sales value to measure labour effectiveness. Incentive bonus is
paid to workers based on the percentage reduction in the labour to sales ratio, comparing
between base period and assessment period.

Recent Trends in Compensation:

Performance Linked Compensation:

Performance linked compensation involves rewarding employees on the basis of their
performance towards the organization either in their individual capacity or as a part of the group.
There are few performance linked compensation plans, these include following:
 Individual based performance linked plans such as piece rate, merit pay and
commission.
 Team based performance linked plans such as gain sharing and bonus.
 Enterprise based performance linked plans such as profit sharing and employee stock
option plan.
Individual Based Performance Plan:
Price Rate:
It is very common performance based information individual level compensation system. Under
this system pay is directly linked to the out put of a worker. As the output increases the pay of
the worker also increases in the same proportion.
Merit Rate:
Merit pay is performance based individual level compensation system in which pay is annual
increment tied to the employee’s performance during the preceding year.
Commission:
Another individual incentive system is the commission linked compensation plan. It is widely
used in sales jobs. Commission plans for sales employees may be based either on straight
commission or a base salary plus commission.

Team Based Performance Linked Plan:

These plans are of two types: Gain Sharing and Bonus.
Gain Sharing:
Gain sharing is a team based performance linked compensation plan in which a portion of the
gains secured by the organization from group effort is shared with the group. Under this plan the
management compares a baseline of performance with actual productivity during a given period.
When productivity exceeds the baseline an agreed parentage of saving is shared with employees.
Bonus:
Bonus is a performance linked team level compensation reward given to employees in the form
of lump sum payment for meeting the performance goal. It is usually paid annually. There is no
standard format of a bonus plan.
Enterprise Based Performance Linked Compensation:
Profit Sharing:
Profit sharing is a performance linked organizational level compensation plan that generally
involves a definite commitment on the part of management to pay, extra compensation or reward
which bears a definite percentage relationship to company profits.
Profit sharing plans are intended to give employees the opportunity to increase their earnings by
contributing to the growth of their organizational profits.
Employee Stock Option Plan:
ESOP is a performance linked organizational level compensation in which employees are offered
to buy company shares at a discounted price or given the option to purchase shares at a future
date at predetermined price.
Employee Relation & Industrial Relation:
Industrial Relation:
Industrial relations has become one of the most delicate and complex problems of modern
industrial society. Industrial progress is impossible without labour management cooperation and
industrial harmony. The term “Industrial Relations refer to all type of relationships between
all the parties concerned with industry”. The parties related to industry are workers and
their organizations, employers and their organizations, and the state.
The area of industrial relations includes workers, employers and state. Specifically it covers:
1. Relations between employers and workers at the place of work.
2. Collective relations between employers and their organizations and trade unions.
 3. Regulatory role played by the State in regulating these relations.
In short industrial relations involve the study of how people get on together at their work, what
difficulties arise between them , how relations among them are regulated and what mechanism
are set up to protect different interests.

Nature of Industrial Relations:

• Industrial relations are the outcome of the employment relationship in industry.
• Industrial relations include both individual relations as well as collective relations.
• The concept of industrial relations is multi-dimensional and complex.
• The main purpose of industrial relations is to maintain harmonious relationships between
management and labour.
• The state evolves, influence and regulates industrial relations through laws, rules,
agreements, awards of courts, executive and financial machinery.
Objective of the Industrial Relations:
The primary objective of industrial relations is to establish cordial relations between the worker
and the management and industrial democracy and peace.
Other objectives are:
 Safeguarding the interests of the workers and management by promoting understanding
and goodwill between them.
 Establishing and maintaining industrial democracy by providing an opportunity to the
workers to have a say in the management and decision making.
 Avoiding industrial conflict and ensuring industrial peace by providing better working
and living standards to workers.
 Minimizing labour turnover and absenteeism by providing job satisfaction to the workers.
 Regulating production by minimizing industrial conflicts through State control.

Importance of Industrial Relations:

Good industrial relations yield the following benefits:
 Establishing Industrial Peace
 Promotes industrial democracy
 Ensures higher productivity
 Brings benefits to workers
 Facilitates introduction of change