Wage and Salary Administration - Nora Bhatia

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Wage and Salary Administration- Nora Bhatia
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Compensation concept and context
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Compensation

• Why
• Rewards that motivate employees to perform
• Help foster the values, culture, behavior
  required
• Achievement of business objectives
• Attract and retain talent
• Sense of commitment to the orgn
• Acquire a competitive advantage

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Compensation

• Direct compensation financial remuneration,
  usually cash. Basic, DA, Shift allowance, bonus,
  incentives etc
• Indirect compensation benefits like PF,
  Pension, medical, health insurance, sick leave

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Compensation

• Internal equity wage differentials reflect the
  degree of difficultly. Corresponds to the
  difference in the evaluated contents of the job
• External equity wage rate in an orgn is
  commensurate with wage rate for similar jobs in
  the industry, region

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Functions responsibilities of a compensation
program

• Formulate compensation plans
• Job evaluation system
• Ascertain going rates for jobs across the
  industry
• Make policy recommendations
• Supervise and maintain records pertaining to all
  matters of compensation
• Framing a compensation policy aligned to business
  goals and objectives
• Promote team and unit performance

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Corporate compensation policy

• Strategy of wage increase productivity linked /
  cost reduction factor
• Rationality and hygiene factors linked to job
  outcome
• Internal equity
• External equity
• Review evolutionary process
• Managerial compensation

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Issues and current trends

• Broad banding greater flexibility
• Pay for knowledge, skills and competency (Ph.D,
  MBAs)
• Team pay plans
• Coping with change increasing expectations,
  multi-skilled

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Group work and discussion
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Wage Theories

• Subsistence theory
• David Ricardo
• Price of labour depends on the subsistence of
  labour
• Price equals to the amount of commodities
  required to feed, clothe a worker and to subsist
  and perpetuate his race
• Labor like any commodity can be bought and sold
• Supply less higher than subsistence wage, more
  children, back to subsistence wage
• Supply high lower than subsistence wage, fewer
  children, back to subsistence wage

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Wage Theories

• Surplus value theory
• Karl Marx
• Tendency of the capitalist, chronic unemployment
  and existence of industrial reserve army that
  kept wages at subsistence level
• Supply of labor always tended to be kept in
  excess
• Worker did not get full compensation for work
  done
• Rate of surplus labor which is the ratio of
  surplus labor to necessary labor is called rate
  of exploitation

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Wage Theories

• Wage fund theory
• Adam smith
• Wage fund assumed to be fixed
• Any change in wages was due to the number of
  workers seeking employment
• Bargaining Theory
• John Davidson
• Upper limit (beyond which employer will incur
  losses)

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Wage Theories

• Purchasing power theory
• High wage rate more purchasing power, increase
  in demand and thus higher output
• Low wage rate less purchasing power, fall in
  demand will affect employment and output

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Behavioral Theories

• Content theories What motivate people to work
• Hierarchy of needs Abraham Maslow
• Two factor theory Friedrich Herzberg
• Hygiene factors
• company policy and administration
• supervision technical
• salary
• working conditions
• If absent will lead to employee dissatisfaction

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Behavioral Theories

• Two factor theory Friedrich Herzberg
• Motivating factors
• recognition
• work itself
• responsibility
• advancement
• If present can lead to employee satisfaction and
  motivation

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Wage Theories

• ERG theory
• Clayton Alderfer
• Existence (survival or physical being
• Relatedness (interpersonal)
• Growth (personal development)

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Process theories

• Motivation and effort the relation
• Expectancy theory Victor Vroom
• An individuals preference for a particular
  outcome
• Youngsters single, unmarried, lesser need for
  childrens education, health benefits, travel
  concessions
• Senior employees retiral benefits, health
  insurance,

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Equity theory

• Inequity occurs when a person perceives that the
  ratio of his/her outcomes to inputs and the ratio
  of a relevant others outcomes to inputs are
  unequal.
• Persons outcomes Others outcomes
• Persons inputs ltgt Others inputs

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Key considerations public policy

• Fix statutory minimum wages
• Equal pay for equal work
• Regulate wages to reduce disparities
• Compensate for rise in cost of living
• Capacity to pay Supreme court an employer who
  cannot pay minimum wages has no right to exist

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Key considerations public policy

• Practical problems
• Minimum wage organized and unorganized sector
• Possible to pay for ones need, not his greed
• Labour cost and productivity ITC cost per
  cigarette at the same level for a 5-year period
• Merit and seniority progression time bound
  promotions ?
• Motivation money may not be everything but
  everything else is way behind
• Integrity compensate them adequately enough to
  keep them out of temptation

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Group work and discussion
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Legal framework of wage and salary administration
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• Minimum wage not only for bare subsistence but
  also for preservation of efficiency and providing
  some measure of medical, education, etc
• Living wage protection against ill-health,
  requirements of essential social heads, insurance
  against some future misfortune, etc
• Fair wage Lower limit is minimum wage and upper
  limit is the capacity of the industry to pay.
  Between these two the actual wage depends on
  prevailing wage rate, productivity of labour,
  place of the industry in the national economy

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Wages defined in different enactments Payment
of wages Act 1936

• "wages" means all remuneration (whether by way of
  salary, allowances, or otherwise) expressed in
  terms of money or capable of being so expressed
  which would, if the terms of employment, express
  or implied, were fulfilled, be payable to a
  person employed in respect of his employment or
  of work done in such employment, and includes-
• (a) any remuneration payable under any award or
  settlement between the parties or order of a
  court
• (b) any remuneration to which the person employed
  is entitled in respect of overtime work or
  holidays or any leave period
• (c) any additional remuneration payable under the
  terms of employment (whether called a bonus or by
  any other name)
• (d) any sum which by reason of the termination of
  employment of the person employed is payable
  under any law, contract or instrument which
  provides for the payment of such sum, whether
  with or without deductions, but does not provide
  for the time within which the payment is to be
  made
• (e) any sum to which the person employed is
  entitled under any scheme framed under any law
  for the time being in force,

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Wages defined in different enactments

• but does not include-
• (1) any bonus (whether under a scheme of profit
  sharing or otherwise) which does not form part of
  the remuneration payable under the terms of
  employment or which is not payable under any
  award or settlement between the parties or order
  of a court
• (2) the value of any house-accommodation, or of
  the supply of light, water, medical attendance or
  other amenity or of any service excluded from the
  computation of wages by a general or special
  order of the State Government
• (3) any contribution paid by the employer to any
  pension or provident fund, and the interest which
  may have accrued thereon
• (4) any travelling allowance or the value of any
  travelling concession
• (5) any sum paid to the employed person to defray
  special expenses entailed on him by the nature of
  his employment or

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Wages defined in different enactments Minimum
wages Act 1948

• wages" means all remuneration, capable of being
  expressed in terms of money, which would, if the
  terms of the contract of employment, express or
  implied, were fulfilled, be payable to a person
  employed in respect of his employment or of work
  done in such employment and includes house rent
  allowance, but does not include-
• (i) the value of-
• (a) any house, accommodation, supply of light,
  water, medical attendance, or
• (b) any other amenity or any service excluded by
  general or special order of the appropriate
  government
• (ii) any contribution paid by the employer to any
  pension fund or provident fund or under any
  scheme of social insurance
• (iii) any travelling allowance or the value of
  any travelling concession
• (iv) any sum paid to the person employed to
  defray special expenses entailed on him by the
  nature of his employment or
• (v) any gratuity payable on discharge

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• Payment of wages Act 1936
• Payment of bonus Act 1965
• Minimum Wages Act 1948
• Payment of Gratuity Act 1972

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Compensation structure and differentials
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• DA
• COLA
• CPI
• Incentive payments
• Individual payment by result
• Group payment by result scheme
• Enterprise level schemes
• Managerial Incentive Plans
• Percentage of profit
• Shares on concessional rates
• Bonuses in cash or kind (discount coupons, paid
  holidays, etc)

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Fringe benefits

• Humanistic consideration education, health,
  housing
• Statutory canteens, rest sheds, crèche,
  maternity, paternity,
• Security Gratuity, PF, Pension, Medical
• Hazard of industrial life ESIC, workmen
  compensation act, Hospitals
• Tax considerations transport, interest free
  loans, loans at concessional rates
• Utilization of leisure time holiday homes,
  foreign trips, guest houses
• Inculcating a sense of involvement concessional
  lunch, subsidized picnics

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Legal framework

• Tripartite boards
• Employers, workers, govt representatives
• Lok Adalats
• Grievance redressal mechanisms

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Collective bargaining

• Levels of bargaining
• Sectoral bargaining at national level govt is a
  long term player.
• Long term settlements
• Banks, coal, ports
• Industry cum region wide agreements
• Cotton, jute, textile, tea
• Decentralized firm/plant level agreements
• Duration 3-4 years
• Trends something for nothing, something for
  anything, something for something, nothing for
  nothing

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• Pay commissions
• Central govt employees
• Recommendations
• Govt usually take economic decisions on political
  considerations
• Wage Boards
• Constitution (equal number of representatives
  employee, employer and 2 independent members
  economist, consumer representative
• Functions of the wage board
• Procedure
• Award of the wage board
• Enforcement of the award

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Group work and discussion
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Job evaluation

• Right man for the right job
• Right pay for the right job
• Method to determine the relative worth of a job

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Job evaluation

• Job analysis breaking down to tasks, functions,
  processes, operation and elements
• Job Description description of a job based on
  job analysis
• Person / job specification statement of content
  of job based on JD
• Job grading ranking of a job based on JA
• Job classification grouping jobs according to
  their worth
• Job assessment monetary value on the basis on
  job grading

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Job evaluation

• Objectives
• Primary
• Establish wage level of a plant
• Bring new jobs in parity with existing jobs
• Facilitate wage negotiations
• Secondary
• Criteria for merit rating and promotion
• Scope for automation and improvement
• Analyse wage rates

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Job evaluation

• Procedure
• Select the group of jobs
• Study the job job analysis
• Prepare the job description
• Device an evaluation plan (education, experience,
  responsibilities)
• Committee of raters / evaluate
• Group / classify the jobs
• Convert job grades to money value
• Obtain approval from union and management
• Establish a grievance procedure

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Job evaluation methods

• Ranking method
• All jobs are ranked in order of complexity,
  responsibility and demands on respective
  employees
• Made easier by identifying those at the two
  extreme ends and then the middle region
• Ranking more than once arrive at final ranking
• Simplest method and less time consuming

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Job evaluation methods

• Classification method
• Grades are established
• JDs description and nature of the job
• Jobs are classified into one of the other grades
• Less time consuming, comparatively easier.
• Irrational in the absence of logic and sometimes
  similar (nearby) jobs are put in different classes

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Job evaluation methods

• Point rating method
• Job is analysed through 5-8 factors and 20-30 sub
  factors
• Given points which total out as the overall
  position of the job
• Not scientific but systematic. Outcome in hard
  numbers
• Time consuming
• Plan for clerical employees is not suitable for
  factory operators (physical effort is not
  essential as against a sedentary job)
• In a sophisticated process plant, the factor of
  mental/visual effect will have a higher weightage
  as against physical effort

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Job evaluation methods

• Factor comparision method
• Factors or elements of a job are evaluated in
  terms of monetary value, eg. Mental requirement,
  skill, physical requirement, responsibility and
  working conditions
• Internal / external comparision of job are
  considered
• Conflict may arise on the valuation of each
  factor

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Job evaluation other methods

• Time span of discretion methods
• Effect of decisions is felt after a period of
  time
• A decision by
• Unskilled worker - few hours
• Marketing manager 1-2 years
• Board of director 4-5 yrs
• Decision band method type of decision
• Band E policy making decisions top mgmt
• Band D programing decisions sr managers
• Band C interpretive decisions middle managers
• Band B routine decisions skilled operators
• Band A automatic decisions (when, how, where)
  semi skilled workmen
• Band O Defined decisions by unskilled workmen

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Group work and discussion
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Compensation Survey

• Informal surveys
• External surveys
• Commissioned surveys
• External survey method
• Job title method
• Job Description method
• Job evaluation method
• Process
• Selection of jobs for wage survey
• Organizations to be included
• Information to be collected

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Compensation Survey

• Benefits
• Compare pay structure
• Entry level pay scales
• Pay differentials in select jobs
• Info on employee benefits
• Trends in compensation

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Reward systems, incentives and pay restructuring
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Merit incentive pay

• Determination of result-oriented merit rating
  procedures
• Identification of job factors
• Scale of reward
• Communication on the basis of monetary reward
• Salesman (sales promotion, collection of
  outstandings, good will calls, after sales
  service

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• Incentive schemes
• Select the objective
• Determine the parameters of performance
• Determine the performance-reward relationship
• Determine the maximum payable incentive amount
• Formulating a communication and review scheme
• Group incentive and productivity sharing
• Long term incentive (ESOP)
• Competency based pay

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Steps in designing incentive schemes

• Custom tailored
• Objectives (short long term)
• Selection of performance measures behaviors
  considered important for organizational
  performance (increasing output, reducing labor,
  other costs, improving quality)
• External influences (changes in production
  methods, product mix, prices of inputs, outputs)
• Distribution avoid absenteeism varied with
  number of days/hours worked
• Equity equal opportunity for all to earn
• Involvement and communication
• Union participation
• Review

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Incentive schemes Issues and Trends

• Levels of education which scheme will be easily
  understood and motivate them
• Trade union
• Organizational culture team spirit and
  involvement
• Monetary and non monetary incentives
• Rewarding good performance enriched role,
  publicity in newsletter

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Group incentives

• Advantages
• Better co-operation
• Less supervision
• Reduced incidence of absenteeism
• Shorter training time
• Disadvantages
• Efficient worker may be penalized for the
  inefficiency of other members
• Incentive may not be strong enough
• Rivalry amongst group members, defeats the purpose

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Incentives

• Merits
• Motivation
• Enhanced earnings
• Productivity improves
• Reduced supervision
• Better utilization on equipment
• Reduced scrap
• Reduced absenteeism and turnover

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Incentives

• Demerits
• Maintenance of quality checking and inspection
• Jealousies some earn more than others
• May oppose introduction of new machinery /
  processes

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Incentives pre-requisites

• Co-operation of workers in the implementation
• Scientific work measurement
• Indirect workers, like crane operators, helpers,
  store keepers should also be covered
• Need for greater planning

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Incentives systems

• The Halsey system standard time to complete a
  task
• Minimum wage is guaranteed
• Time saved in completion of a task
• Usually _at_50
• Taylor differential piece rate system
• Expected to do certain units within a certain
  period of time
• Encourages the efficient worker with a higher
  wage rage
• Penalizes the inefficient with a lower rate of
  payment
• Seldom used now

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Incentives systems

• Premium and task bonuses
• Workers who complete the task in std time or less
  receive wages for the std time plus a bonus
• When a worker fails to turn out the required
  quantity he simply gets the wage rate and no
  bonus
• Profit sharing system

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Incentives systems

• Scanlon Plan
• Developed by Joseph Scanlon of United steel
  workers of USA
• Adopting a measure for increased productivity
• Sharing the gain from that increased productivity
• Promotes teamwork
• High flexibility in generation of decisions and
  execution of the plan

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Group work and discussion
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Stock Options

• Merits
• Attraction
• Retention
• Motivation
• Financial participation of employees in wealth
  created through joint efforts
• Commitment
• Develop a common purpose / ideology between
  employees and employers

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Dearness allowance

• Not linked to CPI
• Flat rate payment is a method under which a
  fixed amount is paid to employees irrespective of
  their categories and wage scales
• Graduated scale DA increase which each scale of
  salary increase but after a limit there is no
  increase in the amount of DA.
• A minimum amount of DA is also set for workers in
  each scale below which DA is not allowed to fall

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Dearness allowance

• Linked to CPI
• Flat rate rate per point with variations in
  points of CPI
• As a percentage of pay
• DA is fixed
• DA is expressed as a fixed percentage of pay and
  equated to a scale of points of the CPI

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Other allowances

• HRA
• LTA/LTC
• Washing allowance
• Conveyance
• Shift allowance
• Cash handling allowance
• Lunch / dinner allowance
• City compensatory allowance
• OT allowance

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Fringe benefits

• Holiday homes
• Medical facilities
• Subsidized meals
• Low interest loans

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Downsizing

• External reasons
• Structural and other changes in the economy
• Changes in technology
• Changes in ownership and control
• Business process re-engineering
• Internal reasons
• Improper / inadequate HR planning
• Wrong selection / recruitment
• Inadequate training
• Substitution of labour with capital

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Approaches to deal with worker redundancy

• Worker flexibility with employment security
  multi-skilled
• Review job specifications at regular intervals
  skill requirements
• Employment practices perpetuate obsolescence
  heirs

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Measures to avoid downsizing or minimize job
losses

• Restrictions on hiring for a limited period
• Spreading reductions over time
• Training and retraining
• VRS
• Counselling and outplacement

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VRS

• Cost and benefits to company
• Relative health of the enterprise something is
  better than nothing
• Real cost to the company less skilled, less
  motivated under-performers may not leave as they
  may not get better opportunities elsewhere
• Cost and benefits to employees
• Golden parachute secure investment
• Family obligations substantial amount spent in
  repaying debt

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How to go about a VRS ?

• Should be the last option rather than first
  traumatic experience
• Identify who will be covered, who not, who will
  opt, who will not
• Awareness. Share the info with employees, union,
  communication channels
• Communication and counselling
• Phased manner to avoid massive reduction in
  manpower. Cash flow effect

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VRS should cover the following aspects

• Applicability
• Eligibility
• Effective date of the scheme
• Duration of the scheme
• Compensation and benefits
• Procedure for application, acceptance and
  withdrawal
• Mode of payment
• Due date for payments
• Procedure for redressal of grievances/settlement
  of disputes

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Group work and discussion
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Emerging issues and trends
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Tax planning

• A conscious well thought out process of arranging
  ones financial affairs
• Taking advantage of deductions, exemptions,
  rebates
• Minimizing tax liability
• Without infringing on any provision tax
  avoidance

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Composition of compensation package

• Salary payment for services rendered
• Relationship employer / employee (power on
  selection, payment, kind of work, supervision,
  dismissal
• Salary v/s wage
• Allowances payments by employer by way of
  allowances for personal benefit of the latter
  chargeable to IT.

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Composition of compensation package

• Perquisites gain / profit incidental from
  employment in addition to regular salary / wages.
• Attached to an office or employment
• Payable only on continuance of employment /
  service
• Ceases when employment comes to an end

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Tax implications of compensation

• Salary
• Allowances
• HRA
• Conveyance
• Travelling allowance
• Perquisites
• Rent free accomodation
• Company owned car
• Furniture
• LTC / LTA
• Medical

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Tax implications of compensation

• Non taxable perquisites
• Refreshments provided during office hours, in
  office premises
• Subsidized lunch in canteen
• Goods manufactured sold to employees at a
  discount
• Subsidized transport office residence
• Premium Group insurance / Personal Accident
  Insurance

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Emerging Trends

• Comparative international compensation
• Job content related compensation link annual
  increment to performance
• Performance related compensation performance
  based annual increment and periodic incentive
  linked to individual / group performance. Allows
  risk of business to be shared with employees

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Emerging Trends

• Competency based compensation
• Job holders competencies not the worth of the
  job
• Predictor of superior performance
• Acquisition of competencies improvement in
  results significantly
• Stock options
• Profit linked bonus

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Paradox of performance related compensation

• Motivates those with high performance ratings
• May help retain high performances, though no
  evidence that poor performers have left the
  organization
• Fairness
• Clear linkage between effort and performance and
  performance and reward

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Broad pay bands

• Progress from one level to another with
  demonstration of requisite competencies
• Must be based on competencies that drive superior
  performance
• Clear about requirements to move to the next
  level

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• 360 degree feedback
• Select the feedback tool
• Select the raters
• Use the feedback
• Review the feedback
• Integrate the process into a larger PMS

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Competency

• It is derived from the Latin word Competere,
  which means to be suitable.
• The concept was orginally developed in Psychology
  denoting Individuals ability to respond to
  demand placed on them by the environment.

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Competencies defined

• A collection of characteristics (i.e. skills,
  knowledge and self-concept, traits, behaviour,
  motivation, etc.), that enables us to
  successfully complete a given task.

Knowledge
Skills
Self-concept (Attitude)
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Iceberg Model of Competencies
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Competency based compensation

• Knowledge, skills, attitudes, personal traits
  that drive superior performance
• Describes what makes people effective in a given
  role
• Behaviors associated with superior performance

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Concept of career stages

• Stage 1 (Dependency)
• Willingly accepts supervision
• Competent at detailed and routine tasks
• Able to perform well under time / budget
  pressures
• Learns how of doing things
• Stage 2 (Independence)
• Assumes responsibility for definable projects
• Relies less on supervision, works independently
• Develops credibility and a reputation
• Develops as an innovator

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Concept of career stages

• Stage 3 (Contribution through others)
• Stimulates others through ideas and knowledge
• Mentor in developing others
• Leader in team performance
• Stage 4 (Leadership through vision)
• Provides direction to the orgn
• Represents the orgn on critical strategic issues
• Champions significant technology and product

89
Communication levels of achievement
Level 1 Level 2 Level 3 Level 4
Under some supervision and / or guidance effectively uses written and verbal communication Independently maintains excellent communication with all appropriate parties. Has strong technical credibility within the group Communicates effectively across functional boundaries to add value to the business and gain support for recommendations Uses communication skills and personal credibility to shape long term technical direction and other significant business decisions
Linking pay to achievement
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Group work and discussion
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Traditional v/s competency based model
Reward component Traditional system competency based system
Basic Pay Based on internal job evaluation and market survey Based on competency level demonstrated by employee
Progression - basic pay one more year of service greater width and depth employee adds to core business
Variable pay privilege of membership of the group share of the employee as a partner in the success of the business
Benefits company decides as a matter of policy Employees share for undertaking risk and accountability
Quality of work life Does what is told. Labour is important, not ideas Empowered
Career opportunity Job for loyalty Mutually responsible, employability
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Compensation issues

• Employers productivity
• Employees cost of living
• Youngsters now
• Senior employees retiral benefits
• Take-home pay
• Net pay
• Pay comparison with co-workers / other industries

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• Group work and discussions

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Thank you !All the best for the exams !