EMPLOYEE REMUNERATION

COMPONENTS OF REMUNERATION

An average employee in the organized sector is entitled to several benefits-both Financial as well as non financial. To be specific, typical remuneration of an employee comprises- wages and salary, incentives, fringe benefits, perquisites, and non - monetary benefits.

Remuneration

Financial Non-financial

FringeBenefits

P.F.Gratuity

Medical careAccident relief

Health andGroup

Insurance,etc.

IncentivesIndividual plans Group Plans

Hourly andMonthly Rated

WagesSalaries

Perquisites

Company car Club

membershipPaid holidays

Furnished houseStock option

Schemes, etc.

Job Context

Challenging jobResponsibilities

RecognitionGrowth prospects

SupervisionWorking

conditionsJob sharing, etc.

direct Indirect

Components of Employee Remuneration

THEORIES OF REMUNERATION

Reinforcement and Expectancy TheoriesThe reinforcement theory postulates that a behavior which has a rewarding experience is likely to be repeated. The implication for remuneration is that high employee performance followed by a monetary reward will make future employee performance more likely. By the same token, a high performance not followed by a reward will make its recurrence unlikely in future.

Vroom’s expectancy theory focuses on the link between rewards and behaviour. According to the theory, motivation is the product of valence, instrumentality and expectancy.

Equity TheoryAdam’s equity theory posits that an employee who perceives inequity in his or her rewards seek to restore equity. The theory emphasises equity in pay structure of employees remuneration.

Agency TheoryThe agency theory focuses on the divergent interests and goals of the organization’s stakeholders and the way that employee remuneration can be used to align these interests and goals.

IMPORTANCE OF AN IDEAL REMUNERATION SYSTEM

An effective system of remuneration is highly significant because several problems relating to personnel centre around one element, namely, remuneration. Many employees, for example, absent themselves from work often because they feel they are not paid enough. They look for new and better prospects because the present emoluments may not be attractive to stay on.

Desire for More pay

performance

strikes

grievances

search for HigherPaying jobs

absenteeism

Turnover

Paydissatisfaction

Lower AttractivenessOf job

Job Dissatisfaction

absenteeism

PsychologicalWithdrawal

Visits to the Doctor

Poor mentalHealth

Consequences of pay Dissatisfaction

Employee setsexpectations

and goals

PerformanceIs rewarded

Employee Considers equityof performance

rewarded

Feedback to

employees

Rewards

are given

Employee sets new goals and

Expectations based on prior experiences

Motivation and Performance Model

If employees see that hardwork and superior performance are recognised and rewarded by the organisation, they will expect such relationships to continue in the future. Therefore, they will set higher level of performance for themselves, expecting higher levels of rewards.

Employee get motivated to perform better when their past performance is rewarded adequately

Influencing factors of Remuneration

remuneration

Business strategy

Employee

Job evaluation & perf Appraisal

Labour Market

Cost of living

Labour

Unions

Legislation

Eco

nom

ySo

ciet

y

Internal Factors

External Factors

Factors Influencing Employee Factors Influencing Employee RemunerationRemuneration

External factorsExternal factors• Labour markets • Cost of Living• Labour unions • Labour laws• Society• Economy Internal factors • Business strategy • Job evaluation & performance appraisal• Employee

Factors Influencing Employee Factors Influencing Employee RemunerationRemuneration

External factorsExternal factors• Labour markets- A low wage may be fixed when supply of labour exceeds the demand & higher wage when demand exceeds supply.• Cost of Living –Cost of living as a criteria for wage fixation is that real wages of workers should not be whittled down by price increases. A rise in cost of living is sought to be compensated by payment of Dearness allowance.•Labour Unions- Presence or absence of labour organization often determine the quantum of wages paid to employees.•Labour laws- Central laws which have a bearing on employee remuneration are: Payment of Wages Act,1936 Minimum Wages Act , 1948 Payment of Bonus Act,1965 Equal Remuneration Act , 1976 Payment of Gratuity Act,1972

• Society-The requirements of a workman living in a civilized & progressive society also came to be recognized . Hence according to Supreme Court , the social responsibility of period provides the background for decisions on industrial disputes relating to wage structure.

• Economy-The last external factor that has impact on wages & salary fixation is the state of economy, example- depressed economy will probably increase the labour supply , which in turn should serve to lower the going wage rate.

Internal factors:Internal factors:• Business strategy –Overall company strategy

determine the remuneration to its employees. Where strategy of enterprise is to achieve rapid growth, remuneration should be higher than competitors pay.

• Job evaluation & performance appraisal- Job evaluation helps establish satisfactorily wage differentials among jobs . Performance appraisal helps awards pay increases to employees who show improved performance.

• Employee – Employee related factors like performance , seniority , experience, potential & even sheer luck determine employee remuneration.

Remuneration plans and Remuneration plans and business strategybusiness strategy

Remuneration strategy must jell with corporate strategy. If corporate strategy is to invest to grows, remuneration strategy should be so designed to stimulate entrepreneuranism.

Linkage of Remuneration strategy to business Linkage of Remuneration strategy to business strategystrategy

Business strategy Market Position and Maturity

Remuneration Strategy

Blend of remuneration

Invest to grow Merging or growth rapidly

Stimulate entrepreneurialism

High cash with above average incentive for individual performance.Modest benefits

Manage earnings-protect markets.

Normal growth to maturity

Reward management skills

Average cash with moderate incentives on individual, unit or corporate performance.Standard benefits

Harvest earnings-reinvest elsewhere

No real growth or decline

Stress on cost control

Below average cash with small incentive tied to cost control. Standard benefits.

Remuneration ModelRemuneration Model

Job Description

Job Evaluation

Job Hierarchy

Pay Survey

Pricing Jobs

Business Today dated September 12 2004, carried a story on salary raises from 2003-2004 in different industries.

2003 (Increase in %)

2004

IT 15 17

1TES 23 25

TELECOM (SERVICES)

10 12

INSURANCE 23 25

BANKING (RETAIL) 12 15

PHARMA 20 22

MANUFACTURING 6 7

Table11.4 Raising Salaries

Development of a wage-trend lineDevelopment of a wage-trend line

10

9

8

7

6

5

4

100 200 300 400 500 600 700 800 900 1000 Point values

Wag

es o

r sa

lari

es

Key Job A

Non-key Job B

Wage-trend line

• In the Fig the vertical axis represents pay rates, horizontal axis is used for points.

• Intersection of the points value & market determined wage rate for a particular key job.

• Example , key job A in the fig is worth 500 points & is paid is paid Rs. 60 per hour , similarly key job B earns 700 points & has a prevailing rate of Rs. 70 per hour.

• Key jobs can be used to draw a wage trend line, employing a statistical technique called least squares method of regression. This method relates point values to wage rates in labour market.

Remuneration

Pay Secrecy

Eliticism or Egalitarianism

Below market Or above

Market rates Comparable worth

Salary Reviews

Employee participation

Skill based payMonetary

VersusNon-monetary

Rewards

Challenges of Remuneration

Skill-based pay and Job-based pay Compared

Factors Job-based Skill-based

Pay structure Based on job performance

Based on ability to perform

Employers focus Job carries wage; employee linked to job

Employee carries wage; employee linked to skills

Employee focus Job promotion to earn greater pay

Skill acquisition to earn greater pay

Procedures required

Assess job content; Value jobs

Assess Skills; Value Skills

Skill-based pay and Job-based pay Compared

Factors Job-based Skill-based

Advantages Pay based on value of work performed

Flexibility; Reduced workforce

Disadvantages Potential personnel bureaucracy; Inflexibility.

Potential personnel bureaucracy; Cost controls.

Concepts of Wages

• Minimum Wage: minimum wage is the one which provide not merely for bare sustenance of life, but also for the preservation of the efficiency of the worker. It is usually determined through legislation.

• Fair Wage: Fair wage is understood in two ways. In a narrow sense wage is fair if it is equal to the rate prevailing in the same trade and in the neighbourhood for similar work. And in a wider sense it will be fair if it is equal to the predominant rate for similar work throughout the country and for trades in general.

Concepts of Wages

• Living wage: Living wage is a step higher than fair wage. It may be described as one which should enable the wage earner to provide for himself/herself and his/her family more than bare essential of life, including education for children; protection against ill health; requirement of essential social needs etc. A living wage must be fixed considering the general economic conditions of the country.