Year: 2020

Wage differentials that show the differences in the rate of wages among workers working in the same unit, different units, different occupations, different regions and the like have emerged as a common feature of labour markets in various countries.

Wage differentials bear a direct relationship to the diversity in occupation and industries that exist in the economic sphere of activity in a country. A certain job requiring a certain skill is paid more or less than another job requiring a different skill either in the same or some other industry. There are a variety of contributory factors.

Wage differential refers to differences in wage rates due to the location of company, hours of work, working conditions, type of product manufactured, or other factors. It may be the difference in wages between workers with different skills working in the same industry or workers with similar skills working in different industries or regions.

We will get different terms as occupational wage differentials, inter-industry, inter-firm, inter-area or geographical differentials and personal differentials because wages differ in different employments or occupations, different industries and localities, and even between the persons in the same employment or grade, etc.

If it is depressed, this will have some effect on wages and consequently on the grades. The rate of dearness allowance (DA) depending on the index chosen will affect wage differentials. In many situations, arbitration or judicial pronouncements have favored a higher quantum for the lowest category of workers.

On a wide scale, there has not been a systematic attempt at job evaluation – an exercise which would have identified the differences in terms of skill training experience, etc. between jobs and provided for relative weightages which could lead to standardization and eradication of distinctions for the same type of jobs.

In the modern organized sector, where collective bargaining is prevalent, there is a trend towards job evaluation schemes. The influence of collective bargaining in terms of pushing up wages in some industries and regions has been quite significant, especially in situations where collective bargaining is coupled with union strength.

Finally, the difference in terms of a unit’s level of productivity and profitability and its influence differentials has to be considered. If both productivity and profitability are high, then the wages sought and given are correspondingly bound to be high.

Salary Differentials and Economy Functions:

Salary differentials perform important economic, functions like labour productivity, attracting the people to different jobs. Since most of the workers are mobile with a view to maximising their earnings, wage differentials reflect in variations in productivity, efficiency of management, maximum utilisation of human force etc.

Attracting efficient workers, maximisation of employee commitment, development of skills, knowledge, utilisation of human resources, maximisation of productivity can be fulfilled through wage differentials, as the latter determines the direct allocation of manpower among different units, occupations and regions so that national production can be maximised. Thus, wage differentials provide an incentive for better allocation of human force, labour mobility among different regions and the like.

Salary differentials play pivotal role in a planned economy in the regulation of wages and development of national wage policy by allocating the skilled human force on priority basis. Development of new skills, knowledge etc., is an essential part of human resource development.

Shortage of technical and skilled personnel is not only a problem for industries but it creates bottlenecks, in the attainment of planned goals. Thus, wage differentials to certain extent, are desirable from the view point of national interest. As such, they probably become an essential part of national wage policy. Complete uniform national wage policy is impracticable and undesirable.

This theory was developed by J.S.Mill. According to him, the employers set apart a certain amount of capital to pay wages for labourers. This is fixed and constant. This is called as wages fund. Wage is determined by the amount of wages fund and the total number of labourers.

According to J.S.Mill, “wages depend upon the demand and supply of labour or as it is often expressed as proportion between population and capital. By population is here meant the number only of the laboring classes or rather of those who work for hire and by capital, only circulating capital………. “.

Wage rate = Wage fund / Number of labourers

An increase in wage rate is possible only by an increase in wage fund or by a reduction in the number of labourers. Thus there exists a direct relation between wage rate and wages fund and inverse relation between wage rate and number of labourers. This theory also states that trade unions are powerless in rising the general wage rate.

Criticisms:

1. Wage fund theory states that the wage rate is found by dividing the wage fund by the number of workers. But it does not tell us about the sources of wages fund and the method of estimating it.
2. Wage fund theory is unscientific and illogical because it first decides the wages fund and then determines wages. But in reality, wages should be found first and from that wage fund should be calculated. This theory neglects the quality and efficiency of the workers in determining the wage rate. This is considered to be a basic weakness of the theory.
3. This theory neglects the quality and efficiency of the workers in determining the wage rate. This is considered to be a basic weakness of the theory.
4. This theory assumes that wages can increase only at the expense of profit. This is not correct. The operation of the law of increasing returns will lead to a great increase in total output which may be sufficient to raise both wages and profits.
5. The wages fund theory has been criticised by the trade unions for its assumption that wages cannot be increased through bargaining.
6. Wages fund theory has failed to explain the differences in wage rate.
7. This theory believes that wages are paid out of circulating capital. But when the process of production is short, wages are paid out of current production. When the process of production is long, wages are paid out of capital.

The subsistence theory of wages was first formulated by Physiocratic School of French economists of 18th century. Further, this theory was developed and improved upon by the German economists. Lasalle styled it as the Iron Law of Wages or the Brazen Law of Wages. Ricardo and Malthus also contributed to the theory of wages. Karl Marx made it the basis of his theory of exploitation.

Assumptions:

According to Ricardo, this theory is based on the following two assumptions:

1. Population increases at a faster rate.
2. Food production is subject to the law of diminishing returns.

According to this theory, wages of a worker in the long run are determined at that level of wages which is just sufficient to meet the necessaries of life. This level is called the subsistence level. The classical economists called it the neutral level of wages. In this way, the pro-pounders of the theory believed in the bargaining power of the workers. In such a situation, trade unions play an important role in increasing wages.

Wages of labour are equal to subsistence level in the long ran. If wages fall below this level, workers would starve. It will reduce their supply. Thus, the wage rate will rise to the subsistence level. On the other hand, if wages tend to rise above the subsistence level, workers would be encouraged to bear more children which will increase the supply of workers, which in turn will bring wages down to the subsistence level.

Criticism:

Following are the main defects of the subsistence theory of wages:

One Sided Theory: This theory examines the wage determination from the side of supply and ignores the demand side.

Pessimistic: Subsistence theory of wages is highly pessimistic for the working class. It presents a dark picture of the future of the society.

Long Period: This theory is based on the assumption of long run. It does not explain the determination of wages at a particular period of time.

No Historical Evidence: This theory has been criticized on the grounds that it has not been correct in conclusions. The case of western countries is different from the conclusions of this theory.

No Difference in Wages: This theory explains that all the workers get equal wages. As we know, the workers differ in their productivity, and hence, the difference in their wages is natural.

It can be shown with the help of the following figure:

In Fig. 1 demand and supply of labour has been measured on OX-axis and wage rate on OY-axis. OW is the subsistence level of wages. At OW wage rate supply of labour is perfectly elastic. Since, supply of labour is perfectly elastic, wage rate neither can fall below OW nor can increase above the level of OW. Although demand increases from DD to D1D1 yet the wage rate remains the same at OW.

• Pay for Position: Pay for position, Position based pay or Job-based pay, pays employees for the job to which they are assigned, regardless of the skills they possess. In other words, pay is centered on the job or position and not on the person. Pay for Position is a more traditional pay structure in which each position is assigned a pay range based on the job duties and pay is based on education and seniority. Employee compensation is set in broadband based on qualifications, education, training & experience Through broad banding, narrowly structured pay grades determined through job evaluation, are replaced by fewer and wider bands Employees progress up through broad band if their performance ratings are good, rather than through steps based on time in the grade It reduces different compensation categories to broad compensation bands, grouping jobs together by common characteristic. Develop an equitable grading structure. Create a reference salary structure. Leverage compensation costs with market survey information
• Pay for Person: Pay for Person or Person focused pay or Skill-based pay or Knowledge-based pay or Competency-based pay structures link pay to the depth or breadth of the skills, abilities, competency and knowledge a person acquires and applies to the work. Structures based on skill, pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of those particular skills. The wage is attached to the person.

The pay increases are usually tied to three types of skills: horizontal skills, which involve a broadening of skills in terms of the range of tasks. Vertical skills, which involve acquiring skills of a higher level depth skills, which involve a high level of skills in specialised areas relating to the same job. Because skill-based pay encourages and rewards a broad range of skills, the employee becomes multi-skilled and more flexible and valuable; A job rotation is used to fill in temporary gaps in the workforce.

Pay for person takes into account the demonstrable characteristics of a person, including knowledge, skills, competency and behaviors, that enable performance. Take into consideration the person’s capabilities & experience in setting a pay level that is both equitable and competitive. It considers the market demand of a person’s unique skills and experience. It also incorporates market-based pay approach

Determine competency/skill requirements and employee capabilities. Pay individuals based on their competency/skill match with position. Identify and pay market premium for competencies/skill in short supply in the market.

• Pay for Performance: Pay for Performance, Performance related pay, Performance-based pay is a financial reward system for employees where some or all of their monetary compensation is related to how their performance is assessed relative to stated criteria. The criteria for performance-related pay scheme may be based on individual, group or organizational performance, or on a mixture of them. Individual-based criteria would require, individual goal-setting, an appropriate performance appraisal system, individual training to increase job knowledge & skills and the individual should have a large measure of control over his/her own performance. Team based criteria are appropriate where individual performance is difficult to measure, or where there is a need for a corporate culture to promote team values and cooperation.

Design annual bonus and incentives plans that motivate staff Shift from merit salary increases to variable pay. Create long-term reward plans – stock options and deferred compensation.

Various trends are emerging in compensation management. As new organizations are emerging, so also are new methods of compensation. Here is an attempt to find out the emerging trends in the sales force compensation methods and its implications for modern-day sales management. We can classify the emerging trends in compensation into four broad categories. The most important trend has been the compensation plan based on the idea of customer satisfaction.

Today, the sales force is not compensated only on the basis of sales volume. The level of customer satisfaction is an important tool of evaluating and rewarding the salespeople. A company like Xerox is the pioneer in designing a compensation plan based on customer satisfaction. It follows a compensation plan based on customer satisfaction defined by the customer itself. This serves as a challenge for the salespeople to achieve the customer-defined satisfaction level.

Another emerging trend is team-based compensation. Though the idea has a Japanese origin, it has found acceptance all over the world. Majority of the B2B selling is done through the team selling strategy and cross-functional teams are designed for handling customer objections in a better way. Clients are also going international in their business operations, and hence customer management is done by more than a single contact point or salesperson.

More and more key account and national account managers are coordinating with the local salespeople to close a sale at multiple points. Many customers are now operating across the territories and geographical boundaries. The organizations need to address their demands and problems at multiple points and in multi-location situations. Hence, it is important to have sales teams.

The performance of the individual salesperson is now linked to the performance of the salespeople in other territories catering to the same set of customers. So companies are replacing the standard straight salary- based or commission-based compensation with team-based compensation, which links the pay of the salespeople with the performance of the customer service personnel, delivery people, and managers heading and supervising the teams.

The technological advances have changed the horizon of customer handling by the salespeople. In the past, the salespeople had to visit every customer to fulfil the information requirement of the customer. Today, email management systems, broadband technology, videoconferencing, and other Web-based technologies enable the salespeople to respond to the customer’s increasing and evolving information need easily and faster.

The customers are also happy with the non- personal form of communication with the salespeople as it leads to lower cost of service and lesser interference by the salespeople at the customer’s place. The e-commerce application has made the communication between the buyer and the seller more interactive and less interfering in nature.

This has made the sales job more target-oriented, as salespeople now can concentrate more on real sales activities than on feeding existing customers with relevant market information, and thus, it has led to an increase in their compensation level due to higher sales realization.

Customers are now spread across the globe and the salespeople serve them by innovative technology and operating across different boundaries and time limits. This has brought the issue of global compensation management systems. Previously the general im­pression was that third world countries are poor in customer care and quality product deliveries, but more and more companies from the West are changing their perception.

Today, majority of customer care and sales service jobs are outsourced to third world countries due to availability of cheap labour and quality of service output. It is a challenge for management to compensate the global sales force working in different countries in different cost zones through an equitable and flexible compensation plan.

Similarly, the challenge is to compensate the sales force with people from various countries but working in the same workplace. While an Indian salary may not be suitable for the European executives in India, the salary paid to an Indian working in the US at the Indian rate may not be adequate for him/her. Therefore, it is also necessary to equate the salary levels of people working in different countries or economy zones.

Compensation plans should be perceived as equitable across the organization. It is observed that the salary structure is low at the base level where the real sales happens and goes higher as one moves farther from the customers to the upper hierarchy levels of the organization. This is a growing trend, which may hamper the growth of many organizations.

It is important to project the sales compensation as equitable for all levels in the sales organization. In many sales, organizations the standard Indian compensation is not equitable from various points of view, including gender inequality.

Male and female employees are paid differently in many com­panies although they are doing a similar kind of job. The management should beware of such discrepancies and try to eliminate them for an effective and equitable compensation plan.

A sales manager needs to design a compensation plan for the organization. There is a scientific method of designing the sales force compensation plan, which every sales manager should follow in organizations. The sales manager should take into account the various factors influencing employee motivation and the purpose of compensation. We will now discuss the various steps followed in designing an equitable, justified, and strategic sales force compensation plan.

Determine Sales Force and Compensation Objectives:

The sales manager should identify the corporate objectives and also the objectives of the salespeople while developing a compensation plan.

The sales objectives can be attainment of the annual sales volume target and gross margins, attainment of monthly and specific period-wise sales targets, market penetration and exploitation of the territory potential at a specific rate, management of sales calls and development of potential in key accounts, development of new customers, and gaining support of the salespeople for the new product introduction.

By evaluating the relative importance of these broad objectives, the sales manager will be able to finalize the level and type of compensation plan to offer to the sales force.

Determine Major Compensation Issues:

Once the sales manager is able to finalize the compensation objectives, he needs to compare his available payment structure with that of the industry and major competitors. In the case of a new compensation plan, the industry average and the competitors’ compensation plans serve as the benchmark for designing the compensation plan.

The major components of salary are decided by taking into account the wage level, the wage structure, the salesperson’s wage, and the salary administration procedure.

The wage level of compensation talks about the salary in relation to the competitors’ sales force compensation. If the organization’s salary level is lower than that of the competitors, the salespeople will always wish to join the competitor, and the competitor will in turn allure them to work with them, which may lead to loss of manpower for the firm. Salaries for various sales­people should be established by doing a comparative analysis of the salary level in the industry.

The wage structure is the explanation of the pay differential inside the organization at different levels. The evaluation of the job and description indicates the extent to which the job contributes to the success of the enterprise. Depending on this evaluation, salary structures are planned at various levels in the organization.

The individual wage is the salary paid to the individual salesperson depending on his work experience, nature of the job, and personal background. His abilities related to job descriptions are evaluated while deciding on the compensation structure.

The administrative issues related to compensation management include the sales force evalu­ation and control mechanism, mechanism for modified compensation, and pay revisions and raises which should be meaningful enough for the salespeople to stay longer with the sales organization. The sales manager prepares the budget for compensation of the salespeople, consi­dering the ability and intention of the organization to compensate the sales force in the form of wages, commissions, perks, bonus, and incentives.

Implement Long-Term and Short-Term Compensation Plans:

The sales manager should take both long-term and short-term views of the sales compensation plan. While in the short term, it should address the issues of adequate compensation and low cost drive for the firm, in the long-term, it should reduce the attrition rate and develop employees to take up higher challenges including managerial responsibilities.

Long-term planning includes promotions, retirement plans, disability benefits, and life insurance for the salespeople. The compensation plans should have a long-term vision and lasting value for the organization. Short-term issues related to the compensation plan include bonus, expenses management, and sales contests. This should be coordinated with the total marketing efforts of the organization and in sync with the long-term compensation plan.

The sales manager should communicate the compensation plan to the sales staff inside the organization through inter-office memos, email, newsletters, and all other means, and explain the advantages and mutual benefits of the sales compensation plan. Many salespeople ask the company at the time of joining about the nature and type of compensation they are likely to receive for the job.

The sales compensation plan should be designed and communicated in such a way that it increases the clarity and comprehensiveness of the salespeople in the organization. The sales supervisor is the key link in the chain of communication to the salesperson. Since salespeople normally work in the field, it is important to brief the sales supervisors about the compensation plan so that they can handle the salespeople’s queries.

The compensation message should include the part of the salespeople’s job that will help the organization in attaining its goals. The sales supervisor should also brief them about the role of the salespeople in achieving the sales objectives.

The sales supervisor should make the salespeople realize that their compensation will largely depend on their ability and intention to contribute to the organization’s goals. If the salespeople commit themselves to the organization and their performance improves, so also will be the sales of the organization and hence the level of compensation for the salespeople.

Relate Rewards to Performance:

In a scientifically designed compensation plan and the plan-related communication strategy, the rewards are always related to the sales performance. This is an important stage in the compen­sation process, where each stage of performance and reward system should be linked with the contribution of individual salespersons towards the organization.

It also links the performance of the salesperson to the rewards through an objective and logical method of performance evaluation.

Measurement of Performance:

Like the compensation plan, the method of evaluations should also be objective and transparent. Sales organizations need to measure the performance of the salespeople periodically. The criteria for evaluation should include the new sales volume achieved in the last period, the level of customer satisfaction, and the level of information dissemination about the performance of the company and its product in the market.

Appraise the Compensation Plan:

It is necessary to look at the redundancy effect of the compensation plan. This should be done on a periodic basis so that the sales manager can find out the relevance of the company’s com­pensation plan in the face of competition and evolutions in the sales management function.

The success of the plan can be evaluated by looking into the achievement of compensation objectives, ability of the firm in attracting new salespeople with- the current compensation plan, and finding out the relationship of the compensation plan with the attrition rate in the organization. The compensation plan should be updated continuously to respond to new sales force objectives. There should be a continuous attempt to link the available compensation methods with the desired performance of the salespeople.

Though a considerable amount of care is taken while designing a compensation plan, but still there are various factors which influence the compensation and pay policies. These factors could be classified into external factors and internal factors. External factors are those factors which are outside the organisation and have uncontrollable factors. While internal factors are the factors which are inside the organization and are controllable, they can be changed as and when the external factors change.

External Factors Influencing Compensation

1. Demand and supply: A wage or a salary is the price paid for the services performed by the people. The firm deserves these services and therefore, it is desirable that they must pay the price which will help to attract, retain and satisfy an individual working for the organisation. The compensation is regulated by the forces such as demand and supply. Pay may be higher if few skilled employees are available. Not only this, but the demand for highly skilled and qualified employee will attract high salaries. While in reverse situation, it could be lower.
2. Economic conditions and compensation: The industry economic condition also affects the compensation. More the competitive industry, the less able the organisation is to pay higher wages. The productivity could also help in higher wages. Productivity can be increased through various means like using advanced technology, training, efficient operating methods, etc.
3. Government influences and compensation: The government affects the compensation plans directly. Any changes in wage guidelines could affect the compensation plan. At different levels, government have very specific things to say about wages and salaries. Equal pay wages, hourly wage regulations, minimum wage, overtime pay, child labour, etc. are amended time and again to do justice to the services given by the employee. And at the same time, employer’s objective is also considered when policies related to wages and salaries are designed.
4. Union influences and compensation: Unions have influenced compensation plans of the organisation many a times in the past. Unions have an effect whether or not the organisation’s employees are unionised. The union demands for a higher wage when they are aware of the ability of the organisation to pay.

Internal Factors Influencing Compensation

1. Labour budget: It mainly identifies the amount of money available for annual employee compensation. A firm’s budget generally reflects the entire amount allocated to a particular division or a unit. It is dependent on the external influence. Any change could lead to change in labour budget.
2. Motivation and compensation: A well designed compensation plan will motivate employees to contribute to the best of their abilities. Motivation is the inner state that energises human goal oriented behaviour. Since different things motivate different individuals, this makes designing of compensation plan complicated and difficult. It is, therefore, important to analyse the employee satisfaction and productivity while deciding on the compensation plan.

A job-based compensation structure typically contrasts a skill-based structure in that you are paid based on the responsibilities of a position rather than your personal skills. While you might prefer the opportunity to optimize your earnings to match your abilities, job-based pay does offer some benefits that are especially important to women.

In a job-based pay structure, you essentially get paid for the value of the work you perform for the company. This gives your compensation a more tangible quality than a skill-based structure where a supervisor must assess the value of the skills and qualities you bring to the table. Employers typically have pay grades or schedules indicating the salary or wage for each particular job, and this enables you to see the relative pay to the duties assigned.

Though not 100 percent certain, job-based pay can reduce the likelihood of gender discrimination in pay. Since the focus is on the job itself, pay theoretically shouldn’t vary based on personal qualities you present. In fact, some employers use job-based structures primarily to protect against discrimination claims. While the glass ceiling, or wage gap, still exists between men and women, job-based pay should ensure that men and women earn equal pay for the same position.

The process of earning more money are generally clear in a job-based structure. Typically, you must gain promotion to a new position to see a significant boost in pay. You can normally look at the job description of a position you want to see what skills and qualities you must possess to gain a promotion. In a skill-based structure, the path to a raise is usually more informal and grounded in the development of new skills and abilities.

Pay comparisons

Though not necessarily your employer’s intent, a job-based structure allows you to more easily compare your salary to those offered by other employers. This is especially true if most companies in an industry use a job-pay structure. A side benefit is that employers using this compensation structure are often more cognizant to compare their salaries to those offered by competitors, which may mean your earning potential is higher or more representative of current market value for your work.

A job based pay structure is a structure of salary payments that is built on compensable factors determined by the job. In other words the salary for a job is determined by its responsibilities, and sometimes its work conditions.

The advantages are:

• It is based on a hierarchical organizational structure, which is the organizational structure for most organizations.
• It is simpler than a person based system as more work is required to define knowledge, skills and competencies required for a person based pay structure.
• Most companies’ pay structures are job based pay structures. This means comparison is possible between companies.
• The hierarchical order of the job structure created the illusion that there are some career paths and possibilities for promotions.

The disadvantages are:

• It reinforces hierarchy and bureaucracy. It is less compatible with team based structures and incentives.
• The hierarchical organizational structure that it is based on has fundamental weakness.
• The job holder may not be competent in the job.
• The job at the top is over paid and the job at the bottom is too paid low. It increases the overall business operating costs.
• It encourages compromise of honesty in job descriptions and job valuations.
• It does not reward employees directly for their knowledge, abilities and individual strengths.
• It does not encourage development of a flexible organizational structure in terms of flatter structure; T-shaped employees and job rotation.
• Some job evaluation systems take short cuts by using a generic set of compensable factors or develop the pay structure by using job classification.

Skill based Compensation Tools

developing a person based pay structure also requires an understanding of the tasks and responsibilities of jobs in a business. Similarly the development of the structure requires job analysis and job descriptions. The difference is that it compensates the job incumbent (person) in terms of his knowledge, competencies and skills. These are called competency-based pay structure, skills-based pay structure or knowledge based pay structure.

A study made by Murray and Gerhart (1998) found that in a person based pay structure, although hourly wages increased, however product quality (scrap percentage), productivity (labour hours per part) improved and overall labor costs decreased (The Oxford Handbook of Human Resource Management By Peter F. Boxall, John Purcell, Patrick M. Wright).

Advantages and Disadvantages of Skills-Based Pay Structures

There are very few person based pay structures, so information on it is mostly academic information. Below are the academic rather than market place explanations.Skills-based pay has the following advantages and potential disadvantages.

Job-based pay has traditionally been the main structure companies have used in determining how much to pay workers. Employers that use this structure pay workers according to the employee’s position and job duties. An employer may also consider the employee’s work experience and seniority as part of the job evaluation. The implicit message to employers who use the job-based pay structure conduct performance appraisals to measure the employee’s contributions to the company.

Some business owners are finding that job-based pay structures do not suit their organizational strategies. They are seeking pay structures that align with their work environments. As companies have changed their work environments, they are basing salaries on other structures that are more useful. For example, as more emphasis is placed on working as a team, companies are basing salaries of the effort’s workers make as a member of a team.

Job-based pay structures can increase a company’s operating costs, which is another disadvantage. For example, the company may have to hire a consulting firm to conduct compensation audits. The business may also have to revise its pay grades every year, which requires more administrative staff.

If job-based pay does not reward the best employees for their work, this can affect how employees are evaluated. When evaluating employee performance, employers that have job-based pay structures are limited in giving pay raises that take the worker’s skills and experience into account. The fact that an employee’s performance may be superb carries less weight in such structures.

Employees who are not rewarded for their job performance may quit because they feel that their contributions are not valuable to the company. For example, an employee whose contributions result in an increase in earnings or new clients will want to be rewarded. Employees can be rewarded with pay raises or bonuses. If the employee receives neither, he may seek employment with other companies.

Job Based Pay Structures

A job-based pay structure is a structure of salary payments that is built on compensable factors determined by the job. In other words, the salary for a job is determined by its responsibilities, and sometimes its work conditions.

The advantages are:

• It is based on a hierarchical organizational structure, which is the organizational structure for most organizations.
• It is simpler than a person-based system as more work is required to define knowledge, skills and competencies required for a person-based pay structure.
• Most companies’ pay structures are job-based pay structures. This means comparison is possible between companies.
• The hierarchical order of the job structure created the illusion that there are some career paths and possibilities for promotions.

The disadvantages are:

• It reinforces hierarchy and bureaucracy. It is less compatible with team based structures and incentives.
• The hierarchical organizational structure that it is based on has fundamental weakness.
• The job holder may not be competent in the job.
• The job at the top is over paid and the job at the bottom is too paid low. It increases the overall business operating costs.
• It encourages compromise of honesty in job descriptions and job valuations.
• It does not reward employees directly for their knowledge, abilities and individual strengths.
• It does not encourage development of a flexible organizational structure in terms of flatter structure; T-shaped employees and job rotation.
• Some job evaluation systems take short cuts by using a generic set of compensable factors or develop the pay structure by using job classification.

Employees work to earn money (wages or salary). This money is broadly termed as compensation. It is the reward they want from management in return for services rendered to the organisation. Compensation or paying employees for their work is an important responsibility of human resource managers. How much compensation a worker wants depends upon his economic needs.

If a man is unemployed and hard pressed, he will be ready to work for lower compensation. If his physiological needs (food, clothing, shelter) are satisfied, he will bargain for better compensation. Good compensation (or pay packet) not only attracts talented employees, it also retains them in the organisation for long run.

“Compensation is a comprehensive term which includes wages, salaries, all other allowances and benefits.” It involves remunerating people for services rendered by them and motivating them to reach the desired level of performance. Compensation may be paid in cash, kind or both.

Benefits of Compensation Management

• One of the most significant benefits associated with compensation management is that it helps the organization achieve employee satisfaction. A happy employee will be more productive, while contributing to the overall profit of the business. This makes employees realize that they are getting equal returns for the time and effort they are dedicating to the organization. The practice of compensation management exerts a positive impact in the employees by influencing them to perform better and increasing their overall efficiency.
• This stabilizes the labor turnover rate as employees get compensated for their work at a competitive market rate. They do not feel the need of leaving the organization. It can then be concluded that compensation management helps increase the loyalty of the employees towards the organization.
• Compensation management is an important aspect of the job evaluation process. It augments the whole process by setting up standards for the company that are realistic as well as achievable, as far as the compensation practices of the organization are concerned.
• It is a practice which helps to improve the relationship of the company with the labor union, as it allows the compliance of different labor laws and acts. If the organization is following the compensation practices same as that of the market, there will be no dispute to settle between them and the labor union.
• It helps the professional growth of employees, as their efficiency increases, when there is a reward present for achieving a certain level of production. This also means that the deserving employees are fairly compensated for the efforts they are putting into their work, thus helping the organization to retain the best talent.
• Compensation Management is the practice that if followed properly, will turn the organization into a hub of talent. This means that more human capital will get attracted to the company, when they will view the compensation package that it will be offering. Also, the organization must keep in mind that monetary rewards are not something that only derives the motivation of the workforce. The overall compensation package must also include the non-monetary rewards, where the employees should be appreciated for the effort they are putting in their work. Therefore, the organization must ensure that its compensation package is based on monetary as well as non-monetary rewards.

Objectives of Compensation Management

1. To Attract Top Talent

Rai University states that one of the primary goals of compensation should be to recruit qualified talent. When you have a competitive compensation plan in place, you’ll be better able to attract top industry talent.

2. To Retain & Reward Personnel

Don’t lose your top talent to your competitors because employees believe that the grass will be greener elsewhere. Find out market values for your employees and pay accordingly. You can also set up pay-for-performance models to drive performance by encouraging associates to reach new goals and push farther.

3. To Boost Motivation

When structured effectively, your compensation plan can drive motivation across your teams. Employees who know that they’re being fairly compensated for their work feel appreciated and are therefore more likely to stay engaged, committed, and productive.

4. To Be Compliant

Compensation isn’t just about being fair within the industry; it must also comply with federal regulations, such as the Fair Labor Standards Act. While adhering to standards can complicate your compensation management, it will help protect your company against litigation and ensure fairness across the board for your personnel.

5. To Maximize ROI

It requires some fine tuning, but compensation management is most effective when you get the biggest bang for your buck. In other words, if you can create a compensation plan that stays within budget while also driving productivity through pay-for-performance and other motivational tactics, you’re creating a plan that’s both equitable for the company and advantageous for hardworking employees.

The term human resources imply that people have the capabilities that drives organisational performance along with other resources like machinery, money, materials and information. Human resource management is designing management systems to ensure that human talent is used effectively and efficiently to accomplish the organization goals. HR professionals perform variety of roles. They perform functions at strategic level, EEO (Equal Employment Opportunity), staffing, ensures employee and labour relations with management, risk management and worker participation, rewards and compensation, talent management, etc. The focus of study at this stage is on the role of HR professionals in compensation management.

Following are the roles performed by a HR professional:

1. Develop a compensation philosophy: Compensation philosophies can be developed considering two philosophy:

(i) entitlement philosophy

(ii) performance philosophy.

The entitlement philosophy assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences. While performance philosophy assumes that compensation changes, if performance changes. Organisations working under this philosophy do not guarantee additional or increased compensation simply for completing another year of service.

2. Develop a programme outline: As a part of compensation] plan, a HR professional will design a programme outline which very clearly will indicate the objective of the compensation programme. They should clearly prescribe the process of how a particular compensation strategy will be implemented or executed by the organisation. The objectives will also consider the budget allotted for a particular financial year on compensation and rewards.
3. Job evaluation: Job evaluation aims to determine a job’s relative worth. The job evaluation is a formal and systematic comparison of jobs to determine the worth of one job relative to another. Rank the jobs within each senior vice presidents and manager’s department, and then rank jobs between and among departments. HR professional verifies the ranking by comparing the industry market data and prepares the flowchart of all ranks for each department for easy assessment and interpretation of job.
4. Conduct a job analysis of all positions: One of the most important functions performed by the HR professional is to do the job analysis of all the positions in a hierarchy. HR executives gathers information from the senior departmental heads of marketing, finance, sales, administration, production and other appropriate departments to determine the organisational structure and primary functions of each. Interviewing the department managers and the employees who actually executes it will be helpful in determining the specific job functions. Develop a model of job descriptions which will help in better evaluation of job.
5. Determine job grades: After job evaluation, jobs are further classified into job grades by establishing various levels like senior, junior, intermediate and beginners. HR executives at this stage also determine the number of pay grades, or monetary range of a position at a particular level, within each department.
6. Determine an appropriate salary structure: Job grading helps in classification of jobs which could further be helpful designing a salary structure. Various components of a salary structure is analysed with the market rates and company’s philosophy. If it gets satisfied, then the compensation committee reviews it, makes adjustments if required and goes for further approval from top level management.
7. To obtain top executives’ approval of the basic salary programme: After getting approval from HR committee, HR department develops and presents the cost impact studies that project the expense of bringing the present staff upto the proposed levels or adding any compensation benefits into the present salary structure.
8. Communicate the final programme to employees and managers: Once the salary structure is approved and finalized by compensation committee, HR Executives develop a plan for communicating the new programme to employees using slide shows or movies, literature, handouts, etc.; make presentations to managers and employees; implement the programme; design and develop detailed systems, procedures and forms; work with HR information systems staff to establish effective implementation procedures, to develop appropriate data input forms, and to create effective monitoring reports for senior managers; and execute the compensation programme.
9. Monitor the programme: Organisation’s objective of effective compensation plan is to motivate employees to give their best at work. HR monitors feedback from managers, make changes where necessary, find flaws or problems in the programme and adjust or modify where necessary.