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Compensation administration is one of the most important areas of human resource management because sound compensation policies, programmes and their effective execution are essential to procure, maintain and develop the human resource of the organization to get effective result from them. It involves the selection, designing, development and direction of programmes designed to implement compensation or incentive policy through financial rewards. Beach has defined wage and salary administration as follows: “wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organizational problems, development and maintenance of wage structure, establishing rules for administering wages. Wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items”. The traditional concept of wage and salary administration emphasized on only determination of wage and salary structures in organizational settings. In simple words, “compensation administration is a systematic procedure for establishing a sound compensation structure.”
Meaning of compensation: Compensation may be viewed as a system of reward that motivates an employee to perform better.
The term compensation is used to mean employees’ gross earnings in the form of financial rewards and benefits as part of employment relationship. In terms of human resource management, compensation is referred to as money and other benefits received by an employee for providing services to his employer. Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing total compensation package or salary structure.
Compensation may also be viewed as:
“Compensation means something, such as money, given or received as payment or reparation, as for a service or loss. Compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organizations provide their employees.”
“Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity”
“Compensation is the remuneration received by an employee in return of hisher contribution to the organization. It involves balancing the work employee relation by providing financial and non- financial benefits or incentives to employees.”
Compensation can be classified into:
(1) Financial compensation and
(2) Non- Financial compensation.
Financial compensation includes Direct compensation and Indirect compensation.
The direct compensation is used to describe financial remuneration usually cash and includes such elements as basic pay, dearness allowance, overtime pay, shift allowance, incentive, bonus, profit sharing bonus and commissions, etc.
Indirect compensation or wage supplements or fringe benefits refer to such benefits as provident fund, pension scheme, medical and health insurance and sick leave and various other benefits and perks.
Non- financial compensation includes praise and recognition and satisfaction of employees.
The basic need of compensation management is to meet the needs of both employees and the employer. The employers want to pay as little as possible to keep their costs low. Employees want to get as high as possible. The compensation management tries to balance between these two with following specific needs:
1. Attracting and Retaining Personnel: From organization’s point of view, every organization wants new talent and skill from outside ,for this purpose the compensation management aims at attracting and retaining right personnel at right place in the organization time to time.
2. Motivating Personnel: Compensation management aims at motivating personnel for higher productivity. Compensation management can be designed to motivate people through monetary compensation.
3. Optimizing Cost of Compensation: Compensation management aims at Optimizing cost of compensation by establishing link performance with compensation.
4. Consistency in Compensation: Compensation management tries to achieve consistency-both internal and external-in compensating employees. Internal consistency involves payment on the basis of criticality of jobs and employees’ performance on jobs. External consistency involves similar compensation for a job in all organizations.
The basic objective of establishment of a sound compensation administration is to establish and maintain an equitable compensation structure.
Its secondary objective is the establishment and maintenance of an equitable labour-cost structure, an optimal balancing of conflicting personnel interests so that the satisfaction of employees and employers is maximized and conflicts minimized.
In order to achieve the objectives of compensation management, it should proceed as a process. This process has various sequential steps as shown:
Establish Compensation Policy: Compensation policy is derived from organizational strategy and its policy on overall human resource management. In order to make compensation management to work effectively, the organization should clearly specify its compensation policy, which must include the basis for determining base compensation, incentives and benefits and various types of perquisites to various levels of employees. The policy should be linked with the organizational philosophy on human resources and strategy. Besides, this there must be emphasis on Job Analysis and Evaluation.
Setting of Organization’s Criteria: Organization’s overall criteria is the starting point in the total human resource management process including compensation management. Companies operating in different types of market/product having varying level of maturity, adopt different methods of different compensation plans according to employees performance. Thus, it can be seen that organizations follow different strategies in different market situations and align their compensation criteria and contents with these methods. Cascio has observed that in viewing the compensation from strategic point of view, the companies do the following:
Analysis of Government policy: Compensation plan is always formulated through various factors, both external and internal, which affect the operation of human resource management system. External factor includes conditions of human resource market, cost of living, level of economic development, social factors, pressure of trade unions and various labour laws dealing with compensation management in government policy whereas internal factors includes organization’s ability to pay and employees’ related factors such as work performance, seniority, skills, etc. These factors may be analyzed through wage/salary survey.
Joint consultation with trade union: After analyzing the government policy president of personnel department consult all over the plan with the representative of trade union.
Deciding fringe benefits: Fringe benefits are also set by the personnel department as per the level of job and their performance.
It includes: Meal facility, Pick and Drop facility, Medical facility, Insurance facility etc.
Design and Implementation of Compensation Plan: After analysis of above steps, the organization may be able to design its compensation plan incorporating base compensation with provision of wage/salary increase over the period of time, various incentive plans, benefits and perquisites. Sometimes, these are determined by external party, for example, pay commissions for Government employees as well as for public sector enterprises. After designing the compensation plan, it is implemented which requires its communication to employees and putting this into practice.
Evaluation and Review: Compensation management should have a provision for evaluating and reviewing the compensation plan. It is affected by a various factors like employee satisfaction and morale or in terms of end-result variable like increase of productivity. The evaluation of compensation plan must be done in this aspect. If it does not work, there should be review of the plan to give it a new picture.
The functions and responsibility in a compensation programme involves essentially three aspects:
(1) The determination of wage rates and wage structure,
(2) Maintaining the rationality of wage structure, and
(3) Determining methods of wage payment.
A wage structure is a body of wage rates differentiated by difficulty or degree of responsibility of work in an organization. The wage rate is for a job rather than compensation to an individual.
`Equitable’ wage structure or `internal equity’ implies that wage differentials reflect the degree of difficulty. In other words, the differences in wage rates for jobs correspond to differences in the evaluated contents of jobs.
The wage payment is determined by `Job evaluation’. It is a systematic method of evaluating each job in relation to other jobs in an organization. It is a major method of ensuring equity in the internal rates for jobs.
In view of the complexity of factors, there is a need to define and develop the compensation function in an organization and determine its location and working. The functions and responsibilities of a compensation programme will be as follows:
The function should be operated by someone who has specialized knowledge and skill in compensation programmes. To ensure the effectiveness of the functionary, a coordinating committee should be constituted so that ultimately the objectives of a compensation programme can be achieved.
Q1. Explain the concept and meaning of compensation?
Q2. Discuss the role and importance of Compensation in an organisation.
Q3. Describe the various steps of compensation management process in detail.
Q4.What is the basic purpose behind the establishment of a sound Compensation administration system in the organizations?
Q5.What is the management responsibilities regarding the compensation management programme?
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