Compensation Management in corporates & components of compensation | By

Regu Krishnan
Dy. Manager
Ford India | Introduction:-

The increasing competitiveness of the labour market and turnover of employees had resulted in nightmare in compensation planning. Apart from this, the growing demands of the employees and competitive salaries offered by multinational companies had almost resulted in a compensation war in certain industries.

Therefore, the human resources managers and tax experts have to evolve proper compensation planning for High end and qualified employees. The components of compensation have to be devised in such a way that, it focuses on the growing demands of employees while retaining the competitiveness and profitability of the company.

Industry driven factors:-

There are also certain driven factors that are influencing the compensation planning. The compensation Packages of knowledge workers are different from that of manufacturing sector. The employees working in call centers are compensated differently (vs) employees of technology driven companies.Some notable examples are.,

a) Compensation paid in IT/ITES,
b) Investment banking/Equity research,
c) Software companies,
d) High-end industries having high technology content like Bio/Nano technology.
e) Private research and related fields.Compensation Oval: |

Components of compensation:-

Basic wages/Salaries:-

These refers to the cash component of the wage structure based on which other elements of compensation may be structured. It is normally a fixed amount which is subject to changes based on annual increments or subject to periodical pay hikes. It is structured based on the position of an individual in the organization and differs from grades to grades.

Dearness allowance:-

The payment of dearness allowance facilitates employees and workers to face the price increase or inflation of prices of goods and services consumed by him. The onslaught of price increase has a major bearing on the living conditions of the labour. The increasing prices reduce the compensation to nothing and the money's worth is coming down based on the level of inflation.

The payment of dearness allowance, which may be a fixed percentage on the basic wage, enables the employees to face the increasing prices.

Bonus:-

The bonus can be paid in different ways. It can be fixed percentage on the basic wage paid annually or in proportion to the profitability. The Government also prescribes a minimum statutory bonus for all employees and workers.

There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Profit margin achieved. Bonus plans can also be based on piece wages but depends upon the productivity of labour.

Commissions:-

Commission to Managers and employees may be based on the sales revenue or profits of the company. It is always a fixed percentage on the target achieved. For taxation purposes, commission is again a taxable component of compensation.

The payment of commission as a component of commission is practised heavily on target based sales. Depending upon the targets achieved, companies may pay a commission on a monthly or periodical basis.

Mixed plans:-

Companies may also pay employees and others a combination of pay as well as commissions. This plan is called combination or mixed plan. Apart from the salaries paid, the employees may be eligible for a fixed percentage of commission upon achievement of fixed target of sales or profits or Performance objectives.

Nowadays, most of the corporate sector is following this practice. This is also termed as variable component of compensation.

Piece rate wages:-

Piece rate wages are prevalent in the manufacturing wages. The laborers are paid wages for each of the Quantity produced by them. The gross earnings of the labour would be equivalent to number of goods produced by them.

Piece rate wages improves productivity and is an absolute measurement of productivity to wage structure. The fairness of compensation is totally based on the productivity and not by other qualitative factors.

The GANTT productivity planning and Taylor's plan of wages are examples of piece rate wages and the related consequences.

Sign on Bonuses:-

The latest trend in the compensation planning is the lump sum bonus for the incoming employee. A person who accepts the offer, is paid a lump sum as a bonus.

Even though this practice is not prevelant in most of the industries, Equity research and investment banking companies are paying this to attract the scarce talent.

Profit sharing payments:-

Profit sharing is again a novel concept nowadays. This can be paid through payment of cash or through ESOPS. The structuring of wages may be done in such a way that, it attracts competitiveness and improved productivity.

Profit sharing can also be in the form of deferred compensation at the time of retirement. At the time of retirement the employees may be paid a lump sum or retiral benefits.

Fringe benefits:-

The provision of fringe benefits does not attract any explanation. These includes.,

a) Company cars
b) Paid vacations
c) Membership of social/cultural clubs
d) Entertainment tickets/allowances.
e) Discounted travel tickets.
f) Family vacation packages.

Reimbursements:-

Employees, depending upon their gradations in the organization may get reimbursements based on the Expenses incurred and substantiated. Certain expenses are also paid based on expenses incurred during the course of business.

In many cases, employers provides advances to the employees for incurring certain expenses that are incurred during the course of the business.

Some examples are.,

a) Travel expenses.
b) Entertainment expenses
c) Out of pocket expenses
d) Refreshments expenses during office routine outside office premises.

Sickness benefits/pregnancy:-

The increasing social consciousness of corporates had resulted in the payment of sickness benefit to the Employees of companies. This also includes payments during pregnancy of women employees.

The expenses incurred due to injury or illness are compensated or reimbursed to the employees. In certain companies, the death of an employee is compensated financially.

Companies are also providing supporting financial benefits to the family of the bereaved employees. However, companies covering these cost through appropriate insurance policies like, Medical and life insurance.

Conclusion:-

The whole idea of compensation management can be better understood through the following Pyramid structure. |

| Regu Krishnan
Dy. Manager
Ford India | Source: E-mail July 30, 2007 |
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Compensation Management :

Compensation is the remuneration received by an employee in return for his/her contribution to the organization. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees.
Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.

Components of Compensation System
Compensation systems are designed keeping in minds the strategic goals and business objectives. Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities. Components of a compensation system are as follows:
• Job analysis
• Salary structures
• Pay structure

Need of Compensation Management A good compensation package is important to motivate the employees to increase the organizational productivity. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and self-actualization needs to fulfill. Thus, compensation serves the purpose. The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards