Communications and Media

Employee compensation is a vital part of human resource management. Wages, salaries and other forms of employee compensation constitute a very large part of operating costs. One of the biggest factors affecting industrial relations is the salary or wage  the compensation an employee receives for a fair days work. Majority of union management disputes relate to remuneration. No organization can expect to retain or attract qualified and motivated employees unless it pays them fair compensation.

Employee compensation therefore influences vitally the growth and profitability of the company. For Employees, pay is more than a means of satisfying their physical needs. It provides them a sense of recognition and determines their social status. Remuneration is directly or indirectly one of the mainsprings of motivation in our society. Wages and salaries have significant influence on distribution of income, consumption, savings employment and prices. This is all the more significant in an underdeveloped economy. Thus employee compensation is a very significant issue from the view point of employers, employees and the organization as a whole. In recent years, the necessity for organizations to control labor costs, while at the same time increasing productivity and enhancing quality and customer service, has never been more urgent. Although many companies have become acutely aware of this problem, few companies have yet to fully address this issue. The present competitive environment requires new strategies toward employee compensation, new management and employee practices, and new methods of educating employees to the shifting competitive environment that has brought about the necessity for these changes. (Mercer 2007)

Employee compensation can be classifies into three categories
Base or primary compensation
Supplementary compensation
Incentive compensation

Base or primary compensation refers to basic pay in the form of wages and salaries. It is fixed and paid on the basis of time expended on the job. Supplementary compensation consists of fringe benefits such as housing, medical aid, paid leave, retirement benefits, etc. Incentive compensation refers to monetary compensation paid to motivate employees. It is based either on individual performance or performance of groups as a whole. Changing compensation systems is a difficult task for any organization. Employee and management perceptions of organizational compensation systems are typically well-formed. Concerns and skepticism over how they will be affected by any new system are natural. It is difficult for organizations to achieve compensation driven changes in behavior if their compensation plans have not been adequately communicated, employee understanding and trust established, and new expectations firmly seated and accepted. It goes without saying that communications, training, and execution are critical. (Stephen F. OByrne, Stern Stewart  Co.)
Key Steps in Developing a Compensation Strategy

Developing compensation strategies is a simple process.
Analyze compensation implications
Establish objectives. Compare actual conditions with objectives to identify gaps.
Develop actions to close gaps
Follow through.

Basis of ComparisonBase CompensationSupplementary CompensationMeaningIt means wages and salaries paid to employeesIt means fringe benefits paid in addition to wages and salaries FormWages and salaries are paid in cashFringe benefits are paid in kindPurposePaid to compensate employees for their services Paid to retain employees and to increase efficiencyBasisDetermined on the basis of job evaluation and other relevant factorsDepends mainly on the companys policies and needs
Types of Compensation Structures and Systems (Classification and Compensation Strategies, By Prof. Chang-hyun Cho )

Pay for Performance
In pay for performance systems, a percentage increase in pay depends on the employees
achievement of predetermined measurable production, operations, or other goals. Pay for
performance systems can measure individual, group or organizational performance, and different types of systems are often used together.

Incentive Pay
Incentive pay is given to employees in addition to their base wage, and is intended to induce action or provide motivation. Rather than rewarding employees for their performance, incentive pay can be provided to encourage behaviors and outcomes. Incentive pay can be used as a management tool as well as a compensation scheme.

Broadbanding
In a broadbanded pay structure, combinations of job classifications are grouped into pay bands. This system differs from a conventional grading system because of the greater pay range within each band and the smaller number of bands. Pay progression through each band is normally related to employee competency, performance, and contribution or market rates of pay.

Gain sharingTeam-based Pay
Gain sharing or team-based pay is a method of linking the pay of employees to the level of performance that they have achieved in a team, and rewarding the group for improving
productivity and meeting organizational goals. By reinforcing group performance through the recognition of successful teamwork, an organization can harness the collective potential of employees.

Competency and Skills-based Pay
Competencies are the knowledge, skills and abilities that are needed to accomplish a job
effectively. When used in a pay system, they provide a basis for individual assessment to reward individuals who can positively contribute to the overall values and objectives of an organization. Competency- and skills-based pay reward the way people work -- pay based on competencies recognizes the behaviors needed, while pay based on skills recognizes the knowledge.

Condition-based Pay
Examples of this are pay increases that are awarded because of working conditions or situations that have little or nothing to do with employee performance. Hazardous duty pay is often awarded as an incentive to endure physical hardship or other hazardous working conditions. Locality pay can be provided to encourage an employee to submit to undesirable working conditions, or in recognition of the high cost of living in a particular area.

Compensation Types in a manufacturing set-up
In the case of a manufacturing set-up having a number of workers there are two commonly adopted wage systems. One is the Time Wage System and the other being Piece Wage System.

Time Wage System
Under this system wages are paid on the basis of time spent on the job irrespective of the amount of work done. The unit of time may be a day, a week, a fortnight or a month. In the past, daily wages have been the most common basis and therefore it came to be known as the Daily Wage System.

Piece Wage System
Under this system, remuneration is based on the amount of work done or output of a worker. One unit of output is considered as one piece and a specific rate of wage is paid per piece. Greater is the number of pieces produced by a worker, higher is his remuneration. Thus, a workman is paid in direct proportion to his output. It is therefore called payment by results.

Basis of ComparisonTime Wage System Piece Wage SystemBasis of PaymentTime spent on the jobNumber of units producedNature of Payment Minimum payment to every worker No guarantee of minimum payment Link with ProductivityWages not directly linked with productivityWages are directly linked with productivityQuality of workHighLowCost of MaintenanceLowHighNeed for close SupervisionHighLowAttitude of trade UnionsTrade unions support itTrade unions dislike it

Conclusion
Having looked at the various types of compensation types in general and for manufacturing set-ups in specific. I feel that the Time Wage system is most suited for a manufacturing set-up since the quality of work is not compromised and also the cost of maintaining such a system is quite low.

Compensation decisions should be fully integrated into the organizations business and operations strategy, through its compensation philosophy. The design of compensation systems should be subsequent to, and not precede, this key analysis and decision point. For the high performance firm, an appropriate level of employee involvement can further reinforce the organizations general beliefs and values. To ensure successful implementation, organizations should develop classification and pay strategies that are in alignment with the organizations mission. To do this, an organization must first recognize the importance of developing pay practices within a framework that ultimately comes down to rewarding employees appropriately for the skills, intellect, innovation, energy and commitment that they bring to the organization. When it comes to strategic compensation design, there are additional factors that are fundamental to achieving a Best Practice pay plan
Rewards must be linked to organization strategy.

Plan objectives must be clearly articulated (participants must know what is being rewarded and why).
Behaviors motivated by the plan must support the organizations culture and values.
Plan design must be adaptable to changing business conditions.
All elements of the plan, including expected performance and results, must be clearly communicated and fully understood by participating employees.
Participating employees must be involved in the design process.
Participants must believe the plan has value.