Introduction to Human Resource Management

Chapter 12 : Compensation Management

Definition and Objectives of Job Evaluation, Objectives, Principles of Job Evaluation, Process of Job Evaluation, Techniques of Job Evaluation, Non-Quantitative Techniques, Quantitative Methods, Advantages of Job Evaluation, Limitations of Job Evaluation, Concept of Wage and Salary Administration, Principles Governing Compensation Administration, Purpose of Wage and Salary Administration, Concepts of Different Wages, Basic Wage Plans, Variable Compensation, Executive Compensation, Wage Differentials - National Wage Policy, Theories and Surveys Governing Wage and Salary Administration, Wage Fixing Institutions/Authorities - Concept of Rewards, Types of Incentive Plans, Short-term Plans, Long-Term Plans, Non Monetary Incentives, Guidelines for Effective Incentive Plans, Employee Benefits, Objectives of Employee Benefits, History and Evolution of Benefits Programs, Some Modern Concepts in Employee Benefit Schemes

Chapter Summary

Job evaluation helps in determining the relative worth of each job in an organization. The basic purpose of job evaluation is to ensure the systematic assessment of jobs to determine their worth for the purpose of wage and salary administration. The process of job evaluation starts with a plan, moves to the identification of job dimensions and classification of the jobs and finally ends with the implementation of the evaluation.

There are different techniques of job evaluation, some are quantitative and some are non-quantitative. There are both advantages and limitations to job evaluation. Compensation of an employee consists of mainly three components, the base wage or salary, incentives and benefits. Base wage or salary forms the basis for calculating or determining the total compensation of an employee.

There are three different concepts of wages: the minimum wage, the fair wage and the living wage. The minimum wage is the least of them all and the living wage, the highest. Minimum wage is the base wage that an employee has to be paid to fulfill his basic needs and provide basic amenities for his family. The fair wage takes into consideration the paying capacity of the employer.

The living wage, which is the highest of the three, is aimed at providing a comfortable living for the employee and his family. It includes providing health, educational and social facilities. Traditional wage plans include the piece-wage plan, based on the units produced by the employee and the time-wage plan, based on the total working time of the employee. Modern wage plans include skill-based wage plan, competency-based wage plan and broadbanding.

Variable compensation programs are designed to reward employees in accordance with their performance and not in accordance with their hierarchical position in the organization. They motivate individuals and groups to perform better and also enhance employee involvement in organizational management. The scarcity of executive talent for the running of successful businesses in this highly competitive era, has led to enormous pay packages for executives.

An effective and efficient executive compensation plan should take into consideration various factors like the organizational objectives and stakeholder expectations. Wage differentials can be defined as the difference in wages paid for same or similar work because of various reasons like differences in work schedules, hazards involved, cost of living, or other factors. The wage differentials across the country have given rise to the need for a national wage policy.

Though this is desirable, the differences in the paying capacities of states and industries and the local issues are a hindrance to its practical application. In India, the wage and salary administration is based on different theories like the minimum wage theory and the bargaining theory of wages. Different surveys like the working class family income and expenditure survey and the occupational wage survey further determine the wage fixation from time to time.

There are two types of rewards, extrinsic rewards and intrinsic rewards. Extrinsic rewards are tangible and within the control of the organization. Intrinsic rewards are intangible in nature and depend on the individual's perception. Rewards can also be classified into monetary and non-monetary rewards. Incentives are the rewards given to an employee, over and above his salary, in recognition of his performance.

They can be termed as performance based rewards. Benefits are the rewards an employee receives as a result of his employment with the organization and his position in the organization. They are also called the membership-based rewards. Incentives can be monetary as well as non-monetary. Incentive plans are both long-term and short-term. Short-term incentive plans like the Halsey plan and the Rowan plan reward the employee immediately for his performance over a short period, normally a day.

Long-term incentive plans like profit-sharing plan and employee stock plans reward the employee for his performance over a continued period of time, either one year or his entire tenure with the organization. Incentive plans, to be effective, have to be perceived as fair and transparent by the employees and should not affect the company bottomline. The basic purpose of an employee benefit program is to retain and motivate employees and improve their organizational commitment.

More and more organizations are designing and implementing innovative benefit schemes to attract and retain talent. The diversity in workforce gives rise to a need for different benefit schemes to match individual needs. Therefore, contemporary benefit programs try to provide flexibility to employees in designing their own customized programs, from a basket of benefit schemes. This is called the cafeteria-style benefit plan. The compensation program of any organization, including the salary, the incentives and the benefits should contribute positively to both the employee and the employer.

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