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Importance of Compensation in a Business Company

Compensation does not refer, however, to other kinds of eployee rewards such as recognition ceremonies and achievement parties. The ultimate objectives of compensation administration are: efficient maintenance of a productive workforce, equitable pay, and compliance with federal, state, and local regulations based on what companies can afford. The basic concept of compensation administration—compensation management—is rather simple: employees perform tasks for employers and so companies pay employees wages for the jobs they do.

Consequently, compensation is an exchange or a transaction, from which both parties—employers and employees—benefit: both parties receive something for giving something.

Compensation, however, involves much more than this simple transaction. From the employer’s perspective, compensation is an issue of both affordability and employee motivation. Companies must consider what they can reasonably afford to pay their employees and the ramifications of their decisions: will they affect employee turnover and productivity?

In addition, some employers and managers believe pay can influence employee work ethic and behaviour and hence link compensation to performance.

Moreover social, economic, legal, and political forces also exert influence on compensation management, making it a complicated yet important part of managing a business. Compensation and Reward system plays vital role in a business organization. Since, among four Ms, i. e Men, Material, Machine and Money, Men has been most important factor, it is impossible to imagine a business process without Men. Advantages of Fair Compensation System:

Therefore a fair compensation system is a must for every business organization. The fair compensation system will help in the following: 1.

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If an ideal compensation system is designed, it will have positive impact on the efficiency and results produced by workmen. 2. Such system will encourage the normal worker to perform better and achieve the standards fixed. 3. This system will encourage the process of job evaluation. It will also help in setting up an ideal job evaluation, which will have transparency, and the standards fixing would be more realistic and achievable. . Such a system would be well defined and uniform. It will be apply to all the levels of the organization as a general system. 5. The system would be simple and flexible so that every worker/recipient would be able to compute his own compensation receivable. 6. Such system would be easy to implement, so that it would not penalize the workers for the reasons beyond their control and would not result in exploitation of workers. 7. It will raise the morale, efficiency and cooperation among the workers. It, being just and fair would provide satisfaction to the workers. 8.

Such system would help management in complying with the various labor acts. 9. Such system would also bring about amicable settlement of disputes between the workmen union and management. 10. The system would embody itself the principle of equal work equal wages. Encouragement for those who perform better and opportunities for those who wish to excel. Need for designing of compensation Policy: After going through the role and essentials of a sound compensation system, it becomes imperative that every business organization should be set up for itself a proper Compensation Policy.

The Management of the organization must have well-designed Compensation Policy. The policy calls for deciding the criteria for promotions, up-gradations etc. It would also be necessary to fix up the standard expectations from each and every workmen/employee. The policy should determine the norms to be followed for Performance Appraisal or Job Evaluation. It should also chalk out the need for training, provisions for fringe benefits, welfare schemes etc. It must prescribe the manner in which such benefits would be extended and levels within the organization to which such benefits are extendable.

The incentive schemes and its details, Pay package structure, Tax implications etc. are matters of concern while designing the compensation Policy. Importance of Compensation System: Money makes the mare go is the proverb. It holds good for all the factors participating in the business process expects its fair share of prosperity of the business. Compensation/ Reward System play a vital role in the business organization. And its importance can be very well ascertained as follows: 1. Sound Compensation/Reward System brings amicability and peace in the relationship of employer and employees. . The system brings out the best out of every employee in the organization. It aims at creating a healthy competition among them. And as such, encourages them to work hard and efficiently. 3. The system provides adequate opportunities to those who wish to perform better. The system provides growth and advancement opportunities to the deserving employees. 4. The system upholds the principle of equal wages. It provides transparency and parity too. 5. The perfect Compensation system provides platform for happy and satisfied workforce, this minimizes the labour turnover.

The organization enjoys the stability. 6. The organization is able to retain the best talent by providing them adequate compensation thereby stopping them from switching over to another job. 7. The business organization can think of expansion and growth if it has the support of skillful, talented and happy workforce. 8. The sound Compensation system is hallmark of Organization’s success and prosperity. The success and stability of organization is measured with pay-package it provides to its employees. 9. Both employer and employees get benefited because of the sound Compensation System. 0. A sound Compensation System helps the organization keep pace with changing environment. It helps the organization to cope up with the wage levels in neighboring industries. 11. Sound Compensation System minimizes the complaints from the employees, provides them the congenial work environment to perform better and sets up for them the targets to be achieved. Definite targets help employees know their role in the organization, which minimize wastage, and enhance overall efficiency. It also helps organization to reduce the cost of production and maximize profits The Compensation System

Time RatePiece rate BonusProfit sharingIndirect Monetary Incentive Time Rate System: This system is divided into three categories. Time Rates Ordinary level High Wage LevelGraduated Time Rates Ordinary Level: It is calculated on time (daily, monthly, weekly etc. )The formula for calculation of salary is Rate per hour X Hours worked = Earnings (RPH X HW=E). High Wage Level: It is calculated on hourly basis put over time is not paid. The formula for calculation of salary is RPH X HW = E Graduate System: Payment: the basic is linked with dearness cost of living.

The index of cost of living is varying and that is considered for calculating the remuneration. Formula: Basic Salary is Rs. 2,000/- and Cost of living Index (D. A) is 100% then, Rs 2000+100% of Rs 2000 as cost of living is added, thus total remuneration is Rs. 4000/-. It is after 6 months, cost of living index change 150%. Then basic salary + 150 % of basic salary si. e Rs 3,000/- will make it Rs, 5000. Piece Rate/ Payment Rate (Payment by Results) System of Piece Rate (Payment by Results) Straight Piece RatePiece ;amp; Time Combination Differential Piece Rate

Taylor System Merrick System Gantt Task System Straight Piece Rate: Payment: Flat rate is applicable per unit, which is predetermined. The time spent is not considered. Formula: PPR X O = Earnings. Piece Rate and Time Rate Combinations: Payment: It is a dual rate system, designed to perfect inefficient workers. The worker is ensured to get the minimum payment. If the payment is calculated on the basis of piece rate guarantees and number of pieces fall below the minimum wages guaranteed, he is paid by time Rate. Differential Piece rate: Payment: In favour of piece rate system, minimum wages were assured.

However, under this system, instead of combining time-rate and piece-rate, there are dual rates for different efficiency level. The purpose behind keeping high piece rate for higher efficiency is as the level of production increases, the cost per unit falls. Bonus: Bonus is given by the company to their employees as a reward. It is been fixed by the government i. e 8. 33%. Bonus encourages the employees to work hard. It is a motivating factor for the employees to improve their efficiency. Profit Sharing: Profit Sharing is the most motivating factor.

When the company makes profit it gives some kind of share to their employees as an Annual increment. This helps to motive employees to work hard and get more increment. Indirect Monetary Incentive: Indirect Monetary Incentives like traveling allowance, HRA, Dearness allowance, medical facility etc. are very motivating for the employees. Elements or ingredients of a good wage plan: Before we discuss these two plans, it would be fruitful to know the ingredients of a good wage plan. These are:- 1. It should be easily understandable i. e all the employees should easily understand what they are to get for their work.

They should be instructed in how the wage plan works. 2. It should be capable of easy computation i. e. it should be sufficiently simple to permit quick calculation. Mathematical tables may be supplied, by reference to which calculations can be quickly made. 3. It should be capable of effectively motivating the employees, i. e it should provide an incentive for work. If both the quality and quantity of work are to be stressed at the same time, a plan should be selected that will not unduly influence the worker to work too fast or to become careless about quality. . It should provide for remuneration to employees as soon as possible after the effort has been made. Daily or weekly payment of wage would be preferable to induce employees to work. 5. It should be relatively stable rather than frequently varying so that employees are assured of a stable amount of money. Reasons or factors affecting wage differentials: Wages differ in different employments or occupations, industries and localities, and also between persons in the same employment or grade. One therefore comes across such terms as occupational wage differentials.

Wage differentials have been classified into three categories: First, the differentials that can be attributed to imperfections in the employment markets, such as the limited knowledge of workers in regard to alternative job opportunities available elsewhere, obstacles to geographical, occupational or inter-firm mobility of workers, or time lags in the adjustments of resource distribution and changes in the scope and structure of economic activities. Examples of such wage differentials are inter-industry; inter firm and geographical or inter-area wage differentials.

Second, the wage differentials which originate in social values and prejudices and which are deeper and more persistent than economic factors. Wage differentials by sex, age, status or ethnic origin belong to this category. Third, occupational wage differentials, which would exist even if employment markets were perfect and social prejudices, were absent. Wage differential arises because of the following factors:- a. Difference in the efficiency of the labour, which may be due to inborn quality, education and conditions under which work may be done. . The existence of non-competing group due to difficulties in the way of the mobility of labour from low paid to high paid employments. c. Difference in the agreeableness or social esteem of employment. d. Differences in the nature of employment and occupations. Norms for Fixation of Wages in Industry: 1. While computing the minimum wages, the standard working class family should be considered as consisting of four consumption units and the earnings of women, children and adolescents should be excluded. . The minimum food requirements should be determined on the grounds of a net intake of 2700 calories as laid down by Akroyd for a normal adult in India. 3. Clothing needs should be established on the basis of a per capita consumption of 16. 62 meters per year. 4. As regards housing, the minimum wages should be determined from the standpoint of the rent corresponding to the minimum area specified under the government Industrial Housing Scheme. 5. Miscellaneous expenditure on items such fuel, lighting etc. hould from 20 per cent of the total minimum wage. The resolution further prescribes that the authorities involved in the issue should justify any deviation from these norms. Retirement benefits related enactments in India: Employees’ Provident Fund Act The Act was passed with a view to making some provision for the future of the industrial worker after his retirement or for his dependents in case of his early death and inculcating the habit of saving among the workers.

The object of the Act is to provide substantial security and timely monetary assistance to industrial employees and their families when they are in distress and or unable to meet family and social obligations and to protect them in old age, disablement, early death of the bread winner and in some other contingencies. The act provides for a scheme for the institution of Provident Fund for specified classes of employees. Accordingly, the Employees’ Provident Funds Scheme was framed under Section 5 of the Act, which came into force on 1st November, 1952. Main features of the Act

The Act is applicable to factorize and other establishments engaged in specified industries classes of establishment, which have completed three years of their existence and employing 20 or more persons. The Act, however, does not apply to co-operative societies employing less than 50 persons and working without the aid of power. An establishment, which is not otherwise coverable under the Act, can be covered voluntarily with the mutual consent of the employer and the majority of the employees. Employees drawing a pay not exceeding Rs. 5000 per month (And now it is amended to Rs. 6500/- ecently) are eligible for membership of the fund. Every employee employed in or in connection with the fund from the date of joining the factory or establishment. The normal rate of contribution to the provident fund by the employees and the employers as prescribed in the Act is 10 percent of the pay of the employees. The term “wages” includes basic wage. Dearness allowance including cash value of food concession and retaining allowance, if any. Employees’ State Insurance Scheme The Employees’ State Insurance Scheme Act, 1948 is a pioneering measure in the field of social insurance in our country.

This act came into force from 19th April, 1948. The Scheme under the Act aims at providing for certain cash benefits to employees in the case of sickness, maternity, employment injury and medical facilities in kind, and to make provisions for certain other matters in relations thereto. The term “employee” has wide connotation and would include within its scope functions of clerical, manual, technical and supervisory. Persons whose remuneration (excluding remuneration for overtime work) does not exceed Rs. 6500 a month are covered under the Act.

The Act does not make any distinction between causal or temporary employees or between technical or non-technical employees. Employees employed directly by the principal employer and those employed by or through contractor. However, the definition of “employee” does not include any member of the Indian naval, military or air force. Compensation Structure and its components: One of the most vital factors the motivation, retention and the morale amongst the employees is the compensation system, policies and review philosophies of any organization.

While the bargain able employees generally have their unions to negotiate or review terms with the Management-which are governed by the Long Term Settlements- the terms of the managerial employees are mostly seen to be at the mercy or the goodwill of the organization, reviews of which may or may not be regular or timely, or often do not seem to meet the expectations or logic of such employees. Management Compensation therefore, now plays a very significant part along with the working style and environment, empowerment etc. in the organization’s success strategy.

While individual organizations may have differences in their methodologies based on factors best suited their perceived needs, some general directions are evident, and are discussed below. 1. Salary, Basic Salary or Consolidated Salary continues to remain as the major component of compensation, though Salary Scales are often discarded these days, or used only as guides. Individual Salary is generally decided initially using the Scale, but thereafter performance, contribution to targets or results generated determine the revisions periodically, which may vary widely from individual to individual. Salary broad handling is therefore, getting recognition and acceptance. 2. Grade wise flat Allowance is being considered generally, except where tax exemption benefits are still available, when they continue as separate components. Allowances may be linked to the Salary as a percentage or by slabs, but preference is for flat amounts, which do not increase automatically, and therefore increase could be discretionary, and therefore controllable. 3. Reimbursements of expenses incurred on Company work has become limited, and in line to conform to the tax laws.

Being actual in most cases, they are not considered as a part of the compensation, unless it is provided towards personal benefits. 4. Annual payments: Bonus or Commission, and Leave travel are common features some tax reliefs apply for the latter. 5. Benefits generally comprise of mostly unfurnished company owned or leased accommodation, use of company or leased vehicles, medical coverage, retrial benefits covering Provident Fund, Pension or Superannuation and Gratuity, post-retrial medical assistance, easy loan schemes at low or zero interest rates for house building, cars or vehicles, furniture or utility items etc. enting employees owned housing, club entrance free reimbursement etc. Minor benefits could be provision of security, driver or gardening assistance, else of products or assets at a concessional rate, relocation and transfer expenses including admission etc. fees for children, credit card fees, phones etc. 6. Employee stock option schemes which has been popular in IT industry-,is not extensively used yet, not being tax advantageous to other industries, nor seen as being very attractive with lesser growth trends for their share values especially in the well-established older companies. 7.

Most companies, as against earlier visible costs, use the “Total cost to the Company” concept as basis. Cost of the most benefits are averaged or computed on actual basis, and within the system of the overall cost, but with greater compliance to tax laws, this basket concept is on the wane. 8. Retiral benefits: Some in recognition of the past contribution of pensioners, and to partly offset the inflation post retirement practices periodic improvement in pensions, or a guaranteed grade minimum pension. 9. Performance Bonus that does not increase future liability is being given more as recognition of results generated.

It requires transparent, balanced and fair systems and benchmarks, and also agrees targets by the managers in advance during planning and review discussions. 10. From the earlier grade oriented compensation system within reasonable boundaries, compensation often has to be somewhat tailor made for specialist or key contributors to retain them in the very volatile job market. 11. Compensation review periods have become annual generally and sometimes oftener, as compared to every three to five years earlier, in the fast changing market situation.

Conclusion To summarize, the need to regularly carry out detailed compensation reviews both within and out of the organisation with full support and commitment from the top is essential. Openness and transparency are important to the managers in the very sensitive and personal issues of management i. e. remuneration, and therefore policies and practices should match. The remuneration and the system have to be fair and dynamic Dealing with human feelings still remains a competitively attractive feature.

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Importance of Compensation in a Business Company. (2018, Oct 06). Retrieved from

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