Chapter seven; compensation
Compensation is a reward in which employees receive in exchange for their
performance. It encompasses direct financial compensations such as wages,
salaries, incentives, commissions, and bonuses, as well as indirect payments
(fringe benefits) like employer-paid insurance and vacations.
Objectives of Compensation
·
To motivate the
employees by identifying and satisfying their unsatisfied needs.
·
To recruit and
retain the best personnel.
·
To provide
security to the employees against social risks like old age benefits and
maternity benefits.
·
To protect the
health of the employees and to provide safety against accidents.
·
To promote
employees ‘welfare by providing welfare measures like recreation facilities,
get-together programs, parties, and invitations.
·
To recognize the
official trade union‘s bargaining strength, for a strong trade union.
Consequence of Pay Dissatisfaction
• If employees are
dissatisfied with the type of compensation they receive, the following results
would be exhibited;
·
Low job
performance
·
Absenteeism and
turnover
·
Looking for
better paying jobs
·
Strike and
increased grievance
·
Job
dissatisfaction
Importance of Compensation
To employees:
·
It is the
primary (and often the only) source of income for employees and their family.
·
It is a fair
reward for the work employees perform and the benefit they provide for the employer.
·
It determines
employees’ social status. Income level is often used as a measure of a person’s
worth.
To employers:
·
To attract
capable employees to the organization
·
To motivate them
towards superior performance level
·
To retain their
services for an extended period of time
Factors Affecting Compensation
External Factors:
A.
Labor Market Conditions: The supply and demand for qualified labor in an area
affects wage rates.
B.
Area Wage Rates: A formal wage structure should align with the rates
paid by other employers in the same area for comparable jobs.
C.
Cost of Living: Compensation rates may need periodic adjustments to
maintain employees' purchasing power due to inflation.
D.
Collective Bargaining: Unions aim to secure wage increases above the
inflation rate to improve the standard of living for their members.
E.
Governmental Regulation: Compensation management is subject to government
regulations, such as minimum wage laws, regulations on work hours, and overtime
payments.
Internal Factors:
A.
Employer's Compensation Policy: Each
organization establishes its own compensation policy, which may prioritize
being a pay leader in the industry or maintaining wage competitiveness.
B.
Worth of a Job: The
worth of a job can be determined subjectively or through job evaluation
systems. Job evaluation helps establish pay rates based on factors like skill,
effort, responsibility, and working conditions. It provides some control over
wage structures, even in collective bargaining situations.
C.
Employer's Ability to Pay: Pay
levels are limited by the financial resources available to an employer, such as
profits in the private sector or budgeted funds in the public sector.
D.
Job Requirements: The
difficulty of a job influences its wage level.
E.
Managerial Attitudes: Managerial
attitudes and judgment influence the wage structure and level. Decisions are
made regarding whether to pay below, average, or above-average rates, the
factors to consider in determining job worth, and the weight given to
performance or length of service.
Types of employee compensation
1. Intrinsic
versus Extrinsic Rewards:
A. Intrinsic Rewards: These are personal and psychological rewards that employees derive from their work. Examples include a sense of accomplishment, pride in one's work, or enjoyment of being part of a team.
B.
Extrinsic Rewards: These
rewards are external to the job and typically provided by the organization or
management. They include financial incentives such as salary, promotions, bonuses,
and benefits.
2. Financial
versus Nonfinancial Rewards:
A.
Financial Rewards: These
rewards directly enhance the employee's financial position. They include base
salary, overtime pay, bonuses, profit sharing, and employer-subsidized benefits
like retirement plans and paid vacations.
B.
Nonfinancial Rewards: These
rewards do not directly increase an employee's financial position but add
attractiveness to the job. Examples may include recognition, flexible work
arrangements, career advancement opportunities, training and development
programs, and a positive work environment.
3.
Performance-Based
versus Membership-Based Rewards:
A.
Performance-Based Rewards: These
rewards are tied to individual or group performance. They can include
commission-based pay, incentive systems, merit pay, bonuses based on achieving
specific targets, or other forms of pay-for-performance.
B.
Membership-Based Rewards: These
rewards are allocated based on factors such as seniority, time in rank,
credentials, specialized skills, or membership in particular groups or
categories. They may include cost-of-living increases, benefits, and salary
increases driven by labor-market conditions.
Direct compensation is
used to describe the cash received in the form of base salary, overtime pay,
shift differentials, bonuses, and sales commissions etc.
Wage and salary
Wage: are
typically associated with non-professional or unskilled manual labor. They are
paid based on quantifiable factors such as the total number of hours worked or
the total number of units completed.
Salary: are
generally associated with professional or managerial positions. They are a
fixed amount of money paid to an employee for their service to the organization.
Unlike wages, salaries are not based on quantifiable factors and are typically
provided to employees whose output cannot be easily measured. This includes
professionals like doctors, lawyers, engineers, or office clerical staff.
Approaches/Strategies
to Determining Wages and Salaries:
1.
Time Rate System: This
method involves paying employees a predetermined rate for the time they spend
working, such as an hourly, daily, weekly, or monthly rate.
Ø The wage or salary is fixed based on negotiation,
local rates, or job evaluation, and it remains constant regardless of the
employee's output or performance.
Ø This approach is commonly used for clerical, supervisory, and managerial positions.
Merits of the Time Rate System:
·
Simplicity and
convenience in calculating earnings.
·
Provides a
steady income for employees, allowing for better budgeting.
·
Encourages
attention to the quality of work.
·
Minimizes rough
handling of machinery.
Drawbacks of the Time Rate System:
·
Fails to
differentiate between employees of different abilities, which may not
incentivize high performers.
·
Does not impose
specific time limits on completing tasks, potentially leading to inefficiency.
· May force employees into jobs they are not suited for or interested in.
2.
Piece-Rate System: In this approach, employees are paid based on the
quantity of output they produce. There are different variations of the
piece-rate system:
A.
Tailor's
Piecework Plan: This plan sets two-piece rates, a higher rate for
meeting or exceeding a pre-determined standard, and a lower rate for falling
below the standard.
B.
Merrick
Differential Piece Rate Plan: This plan introduces
three-piece rates to differentiate between efficient and inefficient workers.
It rewards employees based on their performance relative to the standard set.
Advantages of the Piece-Rate System:
§ Provides a direct link between employee earnings and
productivity.
§ Motivates employees to meet or exceed production
targets.
§ Rewards high performers with higher pay.
Disadvantages of the Piece-Rate
System:
§ Quality of output may suffer as employees focus
solely on quantity.
§ Potential health risks if employees prioritize
output over their well-being.
§ Earnings may be affected by factors beyond the
employee's control, such as equipment failure or raw material shortages.
§ Can create rivalry among workers and weaken labor
solidarity, according to some trade unions.
3.
Payment by Result System (PBR): This
system links employee pay directly to their measured performance. It involves
paying employees based on the number of items produced or the time taken to
complete a certain amount of work.
Advantages of the Payment by Result
System:
§ Aligns pay with individual efficiency and output.
§ Reduces the need for extensive supervision.
§ Encourages employee care and responsibility for
equipment maintenance.
Disadvantages of the Payment by Result
System:
·
Quality of
output may be compromised in pursuit of higher quantity.
·
Potential
negative impact on employee health due to excessive workload.
·
External factors
beyond the employee's control can affect earnings.
· Opposition from trade unions due to concerns about competition and solidarity among workers.
4.
Balance
or Debt Methods:
The balance or debt method combines
time-based and piece-rate compensation. Workers receive a guaranteed hourly or
daily rate, and additional income based on productivity.
Ø If their piece-rate earnings exceed what they would
have earned with the time rate, they receive credit for the balance.
Ø If piece-rate earnings are lower, they are paid
based on the time rate, and the excess payment becomes a debt to be recovered
from future earnings. This method benefits efficient workers by allowing them
to increase their earnings.
5. Incentive
Rate System:
The incentive rate system is
used when the output can be measured in homogeneous units, product
specifications do not vary frequently, and the worker's effort directly
influences the output. This system involves two common methods of wage calculation:
A.
Straight piecework: In
this method, a constant rate of pay per unit of output is established.
B. Bonus plans: This method involves determining standard tasks, and bonus payments are made when a worker produces above the standard.
6. Job
Evaluation System:
The job evaluation system is
a method of wage calculation where jobs are described, analyzed, compared, and
evaluated within a unit, branch, or industry. The key characteristics of this
system are:
·
It is a
systematic approach that starts with analyzing the work involved.
·
It attempts to
determine the requirements of the work for any incumbent.
·
It appraises
jobs within an organization.
·
It focuses on
analyzing and describing positions, grouping them, and determining their relative
value based on responsibilities and requirements.
·
It is solely
concerned with assessing the job and not the employees assigned to the job.
·
It establishes
wage differentials rather than absolute wage levels.
The job evaluation
system serves two main objectives: comparing jobs and determining their level
within each occupational group, and comparing jobs between occupational groups.
Achieving the first objective is important for promotion, career planning, and
personnel development, while the second objective is relevant for wage comparisons.
Indirect Compensation
Indirect compensation
includes benefits and services. It can be defined as all employer provided reward
and service other than wage and salaries.
Types of employee benefits and services
1.
Medical and
safety benefits
2.
Education and
training benefits
3.
Payment for time
not worked
4.
Employee service
related benefits
5.
Other employee
benefits
·
Loan benefits
·
Pension or
provident fund
·
Employee
allowance
·
Funeral benefits
·
Dependent
benefits and other
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