III year

COMPENSATION MANAGEMENT
First and last word on compensation management is that, it is core and direct influencing factor on employee motivation and other factors succeeds.
Employees, in exchange of their work, generally expect some appreciation. Money is considered as the most important motivating factor for employees, though non-financial incentives work efficiently. The goals of compensation management are to design the lowest-cost pay structure that will attract, motivate and retain competent employees. Here the term compensation and salary of employee are one and same.
Compensation management is one of the most challenging human resource areas because it contains many elements and has a far-reaching effect on the organisation's goals. The purpose of providing compensation is to attract, retain and motivate employees. There are two main types of financial compensation.
  1. Direct financial compensation - the pay that a worker receives as wages, salaries, commissions and bonuses, and
  2. Indirect financial compensation - all financial rewards that are not included in direct compensation (i.e. benefits).
An example of direct financial compensation is the money the worker receives as wages at the end of the week, or as a salary paid at the end of the month. Many companies pay salaries straight into the employee's bank account.

An example of indirect financial compensation is when the company contributes to an employee's housing subsidy or a pension plan.

Not all compensation is financial. A worker can get great satisfaction from his work and enjoy the environment in which he works. This is called non-financial compensation and cannot be counted in terms of money. For example, a veterinarian might enjoy working outside, going to farms to treat animals and deliver calves. A publisher might enjoy the challenge of producing books that will enrich people's lives.

It is not always possible to provide a perfect pay package (the agreement between the organisation and the employee about how much money and other benefits the employee will receive). Because of this, some companies allow their employees to work out their own compensation packages.


India: Central government employees draw more salary along with benefits than state government employees, compared with private sector employees. There is a particular pay structure fixed for every government employee in India which is not in private companies. The pay structure of government employees in India is as follows

Employee salary : Basic pay + Grade pay + Dearness Allowance (DA) + House Rent Allowance (HRA) + City Compensatory Allowance (CCA)

The details of above said components of salary of government employees are as follows.
  • Basic pay: The primary component of employee salary which is bases for calculation of other components in the employee salary.
  • Grade pay: An amount which is fixed by the government on the range of employee in government hierarchy. (for example; Group A officers have high grade pay than Group B officers.)
  • Dearness Allowance: Certain percentage of the amount on basic pay. This percentage varies from state government to Central government employees. An allowance paid to employees on the basis of consumer Price index. Consumer price index denotes the cost of the products which influences by the inflation. (in simple terms cost of living) At present, 41%  is for state government employees and 72 % is for Central government employees as dearness allowance on their basic pay.
  • House Rent Allowance (HRA): Certain percentage of the amount on basic pay. This percentage varies from state government to Central government employees. This allowance is paid to employees are meeting house rent expenditure.
  • City Compensatory Allowance (CCA): An allowance paid according to the city or town where employee do the job and the purpose of this allowance is to compensate high cost of living especially in cities like Mumbai, Delhi, Calcutta and Hyderabad et cetera . Government decides the amount of allowance to be paid to employees on basis of city or town.


Objective of Compensation 

The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike. The desired outcome is an employee who is attracted to the work and motivated to do a good job for the employer. Patton suggests that in compensation policy there are seven criteria for effective­ness. Compensation should be: 

  1. Adequate Minimal governmental, union, and managerial levels should be met.
  2. Equitable Each person should be paid fairly, in line with his or her effort, abilities, and training.
  3. Balanced Pay, benefits, and other rewards should provide a reasonable total reward package.
  4. Cost-effective Pay should not be excessive, considering what the organization can afford to pay.
  5. Secure Pay should be enough to help an employee feel secure and aid him or her in satisfying basic needs.
  6. Incentive-providing Pay should motivate effective and productive work.
  7. Acceptable to the employee The employee should understand the pay system and feel it is a reasonable system for the enterprise and himself or herself

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