1.

Explain in detail the objectives of compensation planning

Employee compensation is an extremely important aspect of human resource management. Wages, salaries and other forms of
employee compensation constitute a major portion of operating cost in all organizations. Most of the disputes between the trade
union and management are in relation to remuneration. No organization can expect to attract and retain qualified and
motivated employees unless it pays fair compensation. Employee compensation, thus directly influences the growth and
profitability of the company.

Objectives of Compensation Planning

The most important objective of any pay system is fairness or equity. The term equity has three dimensions:

a) Internal Equity: This ensures that more difficult jobs are paid more.

b) External Equity: This ensures that jobs are fairly compensated in comparison to similar jobs in the labour market.

c) Individual Equity: It ensures equal pay for equal work, i.e., each individual’s pay is fair in comparison to others doing the
same/similar jobs.

In addition, there are other objectives as well. The ultimate goal of compensation administration (the process of managing a
company’s compensation program) is to reward desired behaviours and encourage people to do well in their jobs. Some of the
important objectives that are sought to be achieved through effective compensation management are listed below:

a) Attract Talent

Compensation needs to be high enough to attract talented people. Since many firms compete to hire the services of competent
people, the salaries offered must be high enough to motivate them to apply.

b) Retain Talent

If compensation levels fall below the expectations of employees or are not competitive, employees may quit in frustration.

c) Ensure Equity

Pay should equal the worth of a job. Similar jobs should get similar pay. Likewise, more qualified people should get better
wages.

d) New and Desired Behaviour

Pay should reward loyalty, commitment, experience, risk-taking, initiative and other desired behaviours. Where the company
fails to reward such behaviours, employees may go in search of greener pastures outside.

e) Control costs

The cost of hiring people should not be too high. Effective compensation management ensures that workers are neither overpaid
nor underpaid.

f) Comply with Legal Rules

Compensation programs must invariably satisfy governmental rules regarding minimum wages, bonus, allowances, benefits, etc.

g) Ease of Operation

The compensation management system should be easy to understand and operate. Then only will it promote understanding
regarding pay-related matters between employees, unions and managers.

2. Discuss the wage policy of India including the short Introduction of all the
components

National Wage Policy

Wage policy is a sensitive and complex area of public policy because wages exercise a significant influence on income
distribution, prices and industrial relations. But a sound and rational wage policy is necessary for reinsuring reasonable living
standard to the working class and for full utilisation of the country’s human resources. Such a policy should aim at the following:

(a) Optimum allocation of resources and full employment.

(b) Secure optimum rate of economic progress with stability.

(c) Provide maximum economic security to all sections of society.

(d) To establish wage levels at the highest possible level, which the economic condition of the country permits.

(e) To ensure the wage earner a fair share of the increased prosperity resulting from economic development.

A sound wage policy helps to prevent labour exploitation by prescribing statutory minimum wages, by ensuring equal pay for
equal work, by providing for logical wage differentials, by protecting real wages through compensation for rise in the cost of
living and by linking wages to productivity.

As a Welfare State, India is committed to secure for its working population economic and social justice. Our Constitution provides
that the State must endeavour to secure for all workers a living wage and conditions of work which ensure a decent standard of
life as well as full employment, leisure and social and cultural opportunities. The Constitution of India also lays down the
principle of ‘equal pay for equal work’. At present, no National Wage Policy exists in India. However, some norms have been laid
down by the following: -

(a) Committee on Fair Wages (1948)

This Committee introduced the concepts of minimum wage, fair wage and living wage. The Committee pointed out that any
attempt to evolve principles for governing the fixation of wages must be made against the background of the general economic
condition of the country and the level of the national income.

(b) National Commission on Labour (1969)

The Commission suggested that the wage policy has to be framed taking into account such factors as the price level which
can be sustained, the employment level to be aimed at, requirement of social justice, and capital formation need for
growth. According to the Commission, a national minimum wage is not feasible due to widespread regional differences in
the country.

(c) Chakraborty Committee (1974).

The Committee stressed the need for uniformity in wage payments across regions, industries, and occupations. It suggested
that a National Wage Commission and a National Board should be set up. These authorities will evaluate all jobs, workout a
grade structure on the basis of skill differential and fix wages for each grade.

(d) Bhoothalingam Study Group (1978).

The Group recognised widespread disparities and anomalies in wages in the country. It suggested that appropriate
guidelines should be evolved to reduce such disparities and to raise gradually the areas of unduly depressed wages. Trade
Unions strongly opposed the recommendations of the study group. Therefore, the Government shelved its report.

(e) Fifth Pay Commission (1996). The Commission prescribed the minimum and maximum salary. The recommendations of the
Commission helped to widen disparities between A grade and B, C and D grade service groups.

(f) National Commission on Labour (2002).

The Commission recommended that a National Minimum Wage may be notified by the Central Government. Every employee must
pay each worker his one-month’s pay as bonus before an appropriate festival. The Commission also recommended that the
system of two wage ceilings for reckoning entitlement should be suitably enhanced to Rs. 7,500 and Rs. 3,500 for entitlement
and calculation respectively.

3.10 Essentials of a Sound Wage Policy

Despite practical difficulties, there is a need for a rational wage policy. A sound wage policy must have the following essentials:

(a) Wage levels in different occupations and regions should be equitable. They should permit optimum allocation and
utilisation of the country’s resources. In India, there are glaring inequalities of wages in different industries and areas, the
principle of ‘equal pay for equal work’ should be observed.
 (b) The system of wage payment should be such that the advantages of both time wage and piece wage systems are
available.

(c) A minimum wage should be guaranteed to every employee in the form of social security or unemployment insurance. In
addition, sufficient incentive for better performance should be paid.

(d) The policy should be flexible enough to admit necessary changes. It should be flexible enough to admit necessary
changes. It should be simple and easily understood.

(e) An ideal wage policy should fit well into the wider consumption, investment and other economic policies of the country.

Besides the scientific principles, various social factors should also be considered. No principle of wage policy can ever be
applied in variance and in disregard of the realities of a situation. Wage policy has to be pragmatic as well as scientific.

3.Apex is an ITES service provider Company. It is a startup (new) company, which is trying to woo
talent from the market. Being a new company, it might face difficulty in hiring highly talented
candidates. As remuneration plays an important role, what will be the strategic incentives plan Apex
can offer to persuade talented employees, besides providing a good salary?
ypes of Incentive Plans

Individual incentive plans are the most widely used ‘pay for performance’ plans in industry. These pay plans attempt to relate
individual effort to pay. Popular approaches are as tabulated below:

Figure 4.1: Types of Wage Incentive Schemes

4.5.1 Time-based Individual Incentive Schemes

(a) Hasley or Wier Plan

This plan, devised by F. A. Halsey (an American engineer) recognises individual efficiency and pays bonus on the basis of time
saved. The main features of this plan are:

i) Standard time is fixed for each job or operation.

ii) Time rate is guaranteed and the worker receives the guaranteed wages irrespective of whether he completes the work in the
time allowed or takes more time to do the same.

iii) If the job is completed in less than the standard time, the worker is paid a bonus of 50% (33 1/3 per cent under Halsey-Weir
Plan) of time saved at time rate in addition to his normal time wages.

Total Earnings = Time taken x Hourly Rate plus Bonus

(Bonus = 50% of time saved)

Merits:

i) It is easy to follow and relatively simple to operate.

ii) It guarantees minimum wage and thus provides security to the employees.

iii) It provides increasing benefit and incentive to efficient workmen.

iv) The benefit from time saved is shared equally between the employer and the workman.

v) It emphasises the saving of time rather than larger output, hence the workers do not resist its adoption.

vi) The system is based on time saved and not on output, thus preventing over-production.

vii) Saving in time reduces both labour cost and overhead expenses.

Demerits:

i) The worker may be encouraged to rush through work and thus neglect the quality of production to save more time and earn
higher bonus.

ii) It does not provide adequate incentive to highly efficient workmen as it involves sharing of the benefit with employers.

iii) Fixation of standard is not easy.

iv) Earnings are reduced at high level of efficiency. Therefore, it does not act as a sufficient incentive.

(b) The Rowan Plan

This plan was introduced by D. Rowan in 1901. As in Hasley Plan, the bonus is paid on the basis of time saved. But unlike a fixed
percentage in the case of Halsey plan, it takes into account a proportion as follows:

Merits:
i) It assures minimum time wages. It is more liberal than the Halsey plan in that it provides incentive to work and earn extra
remuneration.

ii) As the increase in effort is much less rewarded after a certain stage, an automatic check for limiting production of inferior
quality of goods is ensured.

iii) This automatic check enables the worker to earn a fair wage, because there is less chance of rate cutting by the employer, as
he is not paying extraordinary wages.

Demerits:

i) The ordinary worker may find the bonus calculation a bit difficult.

ii) Like Halsey plan, this plan does not encourage extraordinary efficiency. For example, if the time saved is more than half the
total, earnings begin decreasing.

(c) Emerson Efficiency Plan

This plan was developed by Harrington Emerson. Under this plan, standard time for the job is determined scientifically and a
minimum time wage is guaranteed to all workers. Bonus is given at an increasing percentage beyond the prescribed level of
efficiency (usually 66.67 per cent). Efficiency is measured by comparing the actual time taken with the standard time.

Illustration:

Standard Time (S) = 10 hrs.

Time Taken (T) = 8 hrs.

Time Wage (R) – Rs.20 per hr.

Bonus = 10% up to 75% efficiency

= 20% for 75%-100%

= 30% beyond 100%

Total Wages = (T x R) + (Percentage of bonus x T x R)

In this case, the efficiency level is = x 100 = 125% and, therefore, bonus at 30% is payable.

Total Wages = 8 x 20 + (8 x 20)

= 160 + 48 = Rs.208

Worker A: Time taken 16 hrs, Bonus = NIL

Worker B: Time taken 14 hrs, Bonus = x 14 x 20

Worker C: Time taken 10 hrs, Bonus = x 10 x 20

Worker D: Time taken 8 hrs, Bonus = x 8 x 20

Merits:

i) Guaranteed time wage provides a sense of security to all workers.

ii) It is fair as the rate of bonus is related to the level of efficiency. Wages rise progressively with increase in efficiency.

iii) It encourages healthy competition among workers.

iv) Bonus begins at 66.67 per cent efficiency, which is within the reach of many workers.

Demerits:

i) There is little incentive after 100 per cent efficiency level.

ii) Employer may fix the standard time at a low level making it impossible for most of the workers to earn bonus.

iii) The system may create jealousy and disunity among efficient and inefficient workers.

iv) A great deal of clerical work is involved as efficiency may vary not only from one worker to another but also from one time
period to another.

v) The plan is not very flexible or selective.

(d) Bedeaux Point Plan

This plan was developed by Charles E. Bedeaux in 1911. Under it, standard time for the job is set scientifically and it is expressed
in terms of ‘B’. For instance, a standard time of 240 B means the job should be completed within 240 minutes. In determining
the ‘B’s, the time of operation and the rest time both are taken into account. Minimum time wage is guaranteed to all workers.
The workers who complete the job within or more than the standard time are paid at the normal time rate. Those who complete
the job in less than the standard time are paid bonus for the time saved. Generally, 75% of the wages for the time saved are paid
as bonus to the worker and 25% of the foreman:

Total Wages = S x R + 75% of R (S – T)

Illustration:

Standard Time (S) = 240 Bs (4 hours)

Actual Time taken(T) = 180 Bs (3 hours)

Rate of Wages(R) = Rs. 0.50 per B

Total Wages = 240 x 0.50 + x 0.50(240-180)

= 120 + = Rs. 142.50

Merits:

i) Minimum wages are guaranteed to all workers.

ii) The foreman is motivated to increase productivity as one fourth of the value of time saved is paid to him.

iii) This plan is suitable in factories wherein a worker is expected to perform different types of jobs. All the jobs can be reduced
to standard units called Bs.

iv) Efficiency of different sections/workers in the factory can be compared.

Demerits:

i) Workers may resent sharing the bonus with foreman.

ii) Calculations involved are complicated and workers may not be able to understand them.

iii) Much clerical work is involved.

4.5.2 Output-based Individual Incentive Schemes

(a) Taylor’s Differential Piece Rate System

F. W. Taylor, the Father of Scientific Management, originated this system. The main features of this plan are:

i) There shall be two-piece work rates, one is lower and the other is higher.

ii) The standard of efficiency is determined either in terms of time or output based on time and motion study.

iii) If a worker finishes work within standard time (or produces more than standard output within time) he will be given high
piece rate.

iv) This system penalises the slow worker by paying low rate because of low production, rewards an efficient worker by giving
him high rate because of higher production. Indirectly, this system gives no place to inefficient work. In other words, if the
output of a worker is less than the standard output, he is paid a low rate and vice versa.

(b) Merrick’s Differential Piece Rate System

In Taylor’s Method, the effect on the wages is quite severe in the marginal cases. To remove this defect, Merrick came out with a
Multiple Piece Rate System. There are three-piece rates under this scheme instead of two, and workers producing below the
standard output are not penalised by the low piece rate. Since the earnings increase with increased efficiency, performance
above the standard will be rewarded by more than one higher differential piece rate. The basic features of this scheme are:

i) Up to 83% of the standard output workers are paid at the ordinary piece rate.

ii) 83% to 100% at 110% of the ordinary piece rate.

iii) Above 100% at 120% of the ordinary piece rate.

(c) Gantt Task and Bonus Plan

This plan combines time, piece and bonus systems. The main features of this plan are:

i) Day wages are guaranteed.

ii) Standard time for task is fixed and both time wages as well as a high rate per piece are determined.
iii) A worker who cannot finish the work within the standard time is paid on time basis.

iv) If a worker reaches the standard, he will be paid time wage plus a bonus at fixed percentage (20%) of normal time wage.

v) If the worker exceeds the standards, he is paid a higher piece rate.

Merits:

i) This plan is not as harsh as the Taylor’s differential piece rate system. Hence it is more acceptable to the workers.

ii) Workers can easily understand its working.

iii) It ensures guaranteed time wages to inefficient workers also.

iv) It makes distinction between efficient and inefficient workers because the system ensures time wages for inefficient workers
and piece wages plus 20% bonus for efficient workers.

v) Labour cost per unit decreases with increase in production due to incentive for efficiency given under this plan.

Demerits:

i) It classifies workers into two competing categories (efficient and inefficient) and this may bring disunity among workers.

ii) When this method is used, labour cost will be high for low production.

iii) Extreme care is to be exercised in fixing the guaranteed time rate and determination of standard output. Any error due to
lack of experience will lead to unfavourable consequences.

4.5.3 Accelerated Premium Bonus Plan

This plan is also known as Sliding Scale Bonus Plan because the premium is paid at varying rates for increasing efficiency. In this
plan, as efficiency of worker improves, his earnings would increase in greater proportion. This plan is most suitable for foremen
and supervisors because it will stimulate them to get higher production from workers under their supervision but it is not
advisable to use it for machine operators who may rush through work to earn more, disregarding quality of production.

There is no simple formula for this scheme. Therefore, each firm has to devise its own formula. However, by way of illustration,
a graph of y=0.8x2 may be given as general picture of the scheme (where x is percentage efficiency 100-r- and y = wages).Thus,
Percentage efficiency 100 110 130 150

X 1 1.1 1.3 1.5

1 1.21 1.69 2.25

X 2
0.8 0.97 1.35 1.8
Y = 0.8x2

Table 4.1: Graph of y=0.8x2