Compensation Administration is a strategic management tool of compensation management and HR management to match productivity with cost of labour and employees to get satisfaction of their worth and values. Compensation Administration then fulfils the objectives of both the employers and the employees.
Compensation administration refers to the tasks of compensation managers in designing and implementing a pay program. Taking into consideration the policies, compensation managers must choose the components that they will include in a company’s compensation program, that is, the kinds of base pay, wage and salary, incentives, and benefits they will offer employees with different jobs and skill levels.
The ultimate objectives of compensation administration are – efficient maintenance of a productive workforce, equitable pay, and compliance with federal, state, and local regulations based on what companies can afford.
Learn about:- 1. Meaning and Concept of Compensation Administration 2. Objectives of Compensation Administration 3. Factors Affecting 4. Guidelines 5. Role of HR Manager 6. Challenges of Program.
Compensation Administration: Meaning, Policies, Objectives, Factors, Guidelines, Challenges and Other Details
Compensation Administration – Meaning and Concept
Compensation Administration is a strategic management tool of compensation management and HR management to match productivity with cost of labour and employees to get satisfaction of their worth and values. Compensation Administration then fulfils the objectives of both the employers and the employees.
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Wages and salary are a substantial part of total cost in almost all kinds of organizations. In the present times they are become increasingly heavy on account of pressures from trade unions, competitive pressures, inflationary pressures, etc. Control on the wages and salary cost is of great importance to the employer, though the amount of control which can be exerted on this variable may differ from organization to organization.
Management of employee compensation is called compensation administration. It involves formation and implementation of policies, practices, processes and programmes relating to wages, salaries, fringe benefits and other forms of compensation. The process deals with job evaluation, the design and management of pay structures, pay for performance and control of payroll costs.
Compensation Administration is also called reward management. In the words of Mr. Armstrong, rewards management involves the development and evaluation of rewards processes. These processes deal with assessment of relative job values, the design and management of pay structures, paying for performance, competence or skills, the provision of employee benefits and pension etc.
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According to Decenzo and Robbins, “Compensation Administration aims at designing a cost effective pay structure that will attract, retain and motivate competent employees” the compensation structure should be objective and fair.
Compensation administration refers to the tasks of compensation managers in designing and implementing a pay program. Taking into consideration the policies, compensation managers must choose the components that they will include in a company’s compensation program, that is, the kinds of base pay, wage and salary, incentives, and benefits they will offer employees with different jobs and skill levels.
Administration also involves determining whether the pay program will attract and retain needed employees successfully, whether employees consider the pay program fair, how competitors pay their employees and if competitors are more or less productive.
Compensation also must reinforce the organization’s strategic conditions. Intensifying competition in many industries has brought about shifts in overall corporate strategies and changes in compensation.
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Companies adopt different approaches to compensation administration responsibilities. Some rely on a centralized approach where the design and administration of compensation programs are performed by a single company department. Others opt for a decentralized approach where multiple company departments have these responsibilities. The drawback to the centralized approach is that a compensation program may suit general corporate needs, but not individual department needs. Creating compensation task forces with members drawn from various departments helps avoid this problem. Likewise, the decentralized approach also can lead to problems. This approach may make it difficult to transfer employees from one department to another and may bring about a lack of internal consistency.
Consequently, compensation administrators frequently adopt general guidelines that all departmental compensation policies must follow, but allow departments to develop their own policies.
Concept of Compensation Administration:
The development and administration of a sound W/S policy, plans and its effective implementation necessitate a well-defined administration system, as it has to synchronize two opposite forces acting in an organization. One is the commitment to control the cost to the company and the other being the employees’ satisfaction and industrial harmony.
Compensation administration ensures the establishment of the above and also adequate and timely communication with the unions and the government to effectively design and administer wage and salaries, considering all the factors influencing its determination.
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According to the Salary and Business scholars, “Compensation administration is essentially the application of a systematic approach to the problems of ensuring that the employees are paid in a logical, equitable and fair manner.”
Also, “it is a strategic management to ensure the proper distribution of income and saving to control industrial harmony and manage productivity, profitability and growth of the organization.”
Compensation Administration – Basic and General Objectives
The basic aim of compensation administration is to retain, attract and motivate employees towards the job.
Based on this, it has the following objectives:
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(a) To attract and retain competent employees – An organization pays employees a competitive salary to retain then and also attract salary to retain them and also attract skilful employees from also attract skilful employees from outside. If company’s compensation plan is not offering them competitive salary, no employees get attracted to join such an organization and stick on.
(b) To establish fair and equitable compensation – External equality implies that pay for same job outside the organization should be the same as it is in this organization. Internal equality implies that within the organization similar jobs should have same packages. There should be no favouritism done for any job in any department.
(c) To control costs and improve productivity – Compensation plan should be such that all employees feel fairly compensation by the organization. It will boost up their morale and make them more productive. A sound wage administration should also be able to control cost systematically. As the company grows, gradually the compensation should increase and not haphazardly.
(d) To comply with legal regulations – A sound wage system should comply with all legal challenges imposed by government. If the compensation administration is not able to comply with any bylaw of the country, it can be challenged by employees/unions.
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(e) To reward the desired behaviour – Compensation plan should reinforce desired behaviour and act as incentive for those behaviours in future. Effective compensation plan is the one which gives due rewards to people who are performers, loyal and show examplenary behaviour.
(f) To improve company’s goodwill in the eyes of general public and employees – Wages and salary plan should project a positive image to employer to general public and to employees. This helps in acquiring the best personnel and retaining the competent persons.
The general objectives of the compensation administration are as follows:
1. Control of wage and salary bills.
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2. Establishment of fair and equitable remuneration for various categories of staff.
3. Utilisation of wages and salaries as an incentive to greater employee productivity.
4. Maintenance of a satisfactory public relations image.
Compensation Administration – 13 Main Factors Affecting
Compensation administration is a segment of human resource management focusing on planning, organizing, and controlling the direct and indirect payments employees receive for the work they perform.
Compensation includes direct forms such as base, merit, and incentive pay and indirect forms such as vacation pay, deferred payment, and health insurance. Compensation does not refer, however, to other kinds of employee rewards such as recognition ceremonies and achievement parties.
The ultimate objectives of compensation administration are – efficient maintenance of a productive workforce, equitable pay, and compliance with federal, state, and local regulations based on what companies can afford.
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According to Richard I. Henderson, author of Compensation Management in a Knowledge-Based World “The interaction between 13 factors affects the actual pay rates employees receive, While each factor is straightforward when considered in isolation, it becomes far more complicated when considered alongside the other factors”.
1. Types and levels of skills and knowledge required.
2. Type of business.
3. Union affiliation or no union affiliation.
4. Capital-intensive or labor-intensive.
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5. Company size.
6. Management philosophy.
7. Complete compensation package.
8. Geographic location.
9. Labor supply and demand.
10. Company profitability.
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11. Employment stability.
12. Gender Difference.
13. Length of employment and job performance.
Compensation Administration – Guidelines (With Some Other Principles)
Compensation administration should be guided by the following considerations:
1. Wage policies should be carefully developed, having in mind the interests of – (a) management as the representative of the owners, (b) the employees, (c) the consumers, and (d) the community.
2. Wage policies should be clearly expressed in writing to ensure uniformity and stability.
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3. Wage policies should duly incorporate the differences in the jobs. There must exist a definite plan in which differences in pay for jobs are based upon variations in job requirements.
4. Wage policies should carefully distinguish between jobs and employees. Jobs should be filled up by persons possessing qualities as demanded by the jobs.
5. Wage policies should always aim at establishing equal pay for equal work. In other words, wage rate should not be biased for employees filling up the job.
6. Wage policies should make a proper arrangement for receiving, analysing, and adjusting complaints of workers regarding wage inequities.
7. Management should see to it that the employees know and understand the wage policies.
8. All wage decisions should be checked against the carefully formulated policies.
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9. Wage policies should be evaluated from time to time to make certain that they are adequate for current needs.
10. Departmental performance should be checked periodically against the standards set in advance.
11. Performance ratings of employees should be done periodically to determine performance linked pay.
Some Other Principles of Compensation Administration:
To design a sound compensation administration system and to ensure its effective implementation, organizations must follow certain principles.
There could be several principles but the most important among them are:
1. Job evaluation must be done scientifically.
2. Their plans must match the organizational goals and objectives.
3. The plans and policies must be sufficiently flexible.
4. These plans and policies should simplify and expedite other administration processes.
5. Definite plans should be there for wage differentials depending upon skill, education, experience, responsibilities and work conditions.
6. There should be adequate measures for recognizing an individual’s ability and contributions.
7. Correct and prompt payments should always be ensured.
8. For the revision of wage/salary structure, a wage committee should always be preferred.
9. The wage structure must conform to the existing legislations.
10. All factors influencing compensation in the region should be given proper weightage.
Compensation Administration – Role of HR Manager in Compensation Administration
The human resource manager plays an important role in developing the policies for compensation administration. In many organisations, the task is entrusted to Wage and Salary Committee composed of line and staff executives from different departments. However, the coordinator of the committee is the human resource manager as he has full details of job classifications, job analysis and job evaluation.
The role of HR manager or any other executive concerned with compensation administration are as follows:
1. To approve the systems of job analysis and job evaluation.
2. To check all activities of the salary administration group against the company policies.
3. To recommend to top management the wage policies for the administration of the wage program.
4. To recommend changes in wage policies and in the salary or wage level.
5. To review department-wise compensation schemes.
6. To recommend to the top management specific raises for executives above a specified limit.
Compensation Administration – Challenges of Compensation Administration Program
Pressure is constantly exerted on the compensation committee for pay increases by executives, supervisors and employees. If the committee yields to such pressure, it would serve to boost the wage expenditure of the company above the funds available for the payroll. It may also result in glaring injustice because the rewards that belong properly to the efficient workers would be granted instead to those who could press the hardest.
The aggressive department head may possess in an unusual degree the commendable loyalty to his people that prompts him to take a belligerent stand with reference to salary increases. Because of human element, compensation committee or administrator yields more often to the department head who is aggressive.
Such pressure may be restrained to some extent where a departmental budget system is used. On this basis, if a given department exceeds the budget allowed to it, the departmental head may be asked to explain the reasons for this.
The broad viewpoint of the compensation committee is seldom shared by the individual department head, whose activities are confined to compare the situation within his department with that existing in other departments. Therefore, he is inclined to have a biased view that his department is the most important department in the organisation.
This pride in his own department might lead him to seek higher monetary rewards for his subordinates than they deserve. The wage committee, by virtue of its central position and available records, can readily serve as a much needed break upon the departmental head whose wage scales are significantly higher than are justified by sound company practice and as a spur to the departmental head who is consistently opposed to paying a higher rate than is required.
Sound practice in compensation administration calls for raising wages which are too low as well as curtailing those which are too high. Effective wages and salary administration recognise the need for a direct tie-up between performance and reward and to do economic justice to all employees.
In many organisations, there are serious inconsistencies in the wage scales of different employees. These inequities may be removed through systematic job evaluation which is essential to any sound wage administration program.
The compensation administration program must give attention to the individual pay rates and the pay range when:
(i) Increase of workload makes it necessary to create a new job in a department.
(ii) It is proposed to change the minimum or maximum rates for a job in order to maintain a proper balance.
(iii) It is proposed to change the rate of pay of an individual employee as a result of his demonstrated efficiency or inefficiency.
(iv) It is proposed to transfer an employee to the same job but in another department.
(v) It is proposed to promote an employee to another job in the same or another department.