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K Shailaja Rao

 Compensation is a systematic approach to


providing monetary value to employees in
 exchange for work performed.
 Compensation may achieve several purposes
assisting
 in recruitment,
 job performance,
 and job satisfaction.
 Gary Dessler “Employee compensation refers
to all forms of pay going to employees and
 arising from their employment.” The phrase
‘all forms of pay’ in the definition does not
 include non-financial benefits, but all the
direct and indirect financial compensations.
 According to Thomas J. Bergmann(1988)
compensation consists of four distinct
 components:
 Compensation = Wage or Salary + Employee
benefits +Non-recurring finan-
 cial rewards+ Non-pecuniary rewards.
 Compensation refers to a wide range of financial
and nonfinancial rewards to employees for their
services rendered to the organization. It is paid
in the form of wages, salaries and employee
benefits such as paid vacations, insurance
maternity leave, free travel facility, retirement
benefits etc.,
 Monetary payments are a direct form of
compensating the employees and have a great
impact in motivating employees.
 The system of compensation should achieve the
following objectives.
 The capable employees are attracted towards the
organization
 The employees are motivated for better
performance
 The employees do not leave the employer
frequently
 There are various methods of establishing
employee compensation. Among them, some
of the important one are discussed as under:
 1. Job analysis:
 Job analysis information about jobs, workers
and required qualification, skill, capability
and experience. For this, job description and
job specification is prepared in job analysis.
 i. Job description:
 Job description is a profile of the job to be
performed. It includes job requirements in
terms of duties, responsibilities, authority,
accountability, working condition etc

 ii. Job specification:


 Job specification is a profile of worker's
requirements to do the job. It specifies
minimum qualification, experience and skills
of the employees
 2. Job evaluation:
 Job evaluation system determines the value of
each job to be performed in an organization.
Through job evaluation, position and the job
performed by each of the position are
comparatively evaluated

 i. Job ranking method:


 Under this method, all the information
regarding the job are collected. Qualification,
skills, challenges, difficulties, complexities,
importance, contribution etc. are taken as a
base to rank the job from simplest to the
most complex
 ii. Job grading method:
 Under this method, jobs are categorized into
grades, which is a group of different jobs
requiring similar skills, efforts and
responsibilities. Each job is assigned into a
grade.
 iii. Factor comparison method:
 In this method, the required environment to
each job is studied and evaluated which
serves the basis for compensation
determination. Higher the requirement of
these factors for a job, higher will be the
compensation and vice versa.
 iv. Point method:
 It this method, factors are identified for job
performance and each factor is assigned
predetermined point or score. After having
job performance, scores of each employee
are totalled.
 3. Compensation survey:
 This method collects information from other
competing organization and determines the
compensation to make it more competitive.
Compensation is based on the compensation
received by employees working at similar
position, qualification, levels of other
organization.
 4. Job pricing:
 Importance of job performance, contribution
and required skill, capability qualification and
experience required for job performance etc,
are analyzed, and evaluated to determine the
price of each job responsibility. Based upon
this, the compensation structure of whole
jobs is prepared.
 In the current context, different organization are
using different methods and techniques in the
determination of compensation.
 employee mobility and at the other hand,
 financial position of the organization is being weak
increasing competition and raising compensation.
 To balance these issues, organization are adopting
different tests which form the trends in compensation
management.
 Globalization, diversity, increased level of awareness
and creation of unlimited opportunities has forced
organization to determine appropriate compensation.
 1. Skill based payment:
 The trend of compensation determination
based on skill rather than job performance is
increasing in these days. Skills required for
the job performance are given more
importance by organization and is considered
as a basis for compensation
 In this method, employees are categorized
into different group based upon the nature of
skill, qualification and responsibility while
determine the compensation. Minimum to
maximum compensation is ascertained to
each group and accordingly employees are
comp
 three groups professional, management and
leadership.
 Under this method, jobs are evaluated and
the relative worth of jobs is compared to
determine the compensation. Less
contributing jobs receive lower compensation
and high contribution jobs receive higher
level of compensation.
 The use of variable pay system is increasing.
It is based on improving production and
sharing of prosperity. Different employees
even being on the same level get different
level of compensation on the basis of their
performance or productivity.

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