Compensation
“The purpose of compensation is to attract, motivate & maintain employees.”
Total compensation consists of direct and indirect compensation & the components of
total compensation are following:-
Benefits and Services are called indirect compensation & are also known as ( Fringe
benefits and Perks).Perks is something in addition to the payment like car fuel &
clothing. Whereas fringe means marginal or at the edge of pay because they were
neglected in the past but now they are simply known as “benefits and services” as it
has gained a lot of importance.
Benefits and services are used to persuade or motivate employees and are not linked
with the employee’s performance. It includes any benefits that the employee receives
in addition to their total direct remuneration which increase their wealth or well-being
at some cost of the employer.
Organizational Objectives:-
The main objective is to recruit & retain workers.
Reduce fatigue.
Aid recruitment.
Minimize overtime cost
Reduce Turnover
Boosting Employee morale etc….
Employee Objectives:-
The main objective of employee is that these benefits & services are provided at lower
cost & its availability.
The objectives of society, organization & employees have encouraged rapid growth of
benefits & services.
1. Insurance Benefits:-
The financial risks encountered by employees & their families can be spread by
insurance. These risks are shared when funds are pooled in the form of insurance
premiums. Then when insured risk occurs, the covered employees or there
families are compensated.
It may be defined as a contract or agreement between two parties by which one of
them (called insurer) agrees to indemnify the other (called insured) against a loss
which may occur to other (insured) on the happening of some event. The
agreement or contract is put in writing & is known as “Insurance Policy.”
1. Health-Related Insurance:-
In which employers provide payments for health insurance.
a) Medical Insurance:-
Medical insurance pays for sickness accident & hospitalization expenses up
to the dollar limits (not less than or high up to) or “policy ceiling” of the policy.
Most policies contain a schedule of benefits. This schedule sets forth which
sickness, accident or hospitalization cost are covered & how much of the expenses
will be paid.
Medical insurance may contain:-
Deductible Clause:-
Deductible clause requires the covered employee to pay a specified
amount (usually 200$ to 300$ or more) before insurer is obligated to pay.
A coinsurance clause:-
A coinsurance clause requires the employee to pay a percentage of the
medical expenses.(typically 20% of the expenses)
b) Managed Care:-
It is a health maintenance act of 1973 in which firms with more than 25 or
more employee’s health maintenance organization.
1. Health maintenance Organization (HMOs):-
Provide their own doctors & facilities where members receive services from
those employed by HMO.
2. Preferred Provider Organizations (PPOs):-
Allows subscribers to select doctors & hospitals from an approved list.
c) Vision Insurance:-
Vision insurance provides vision care or vision correction which includes
examination and eye glasses.
d) Dental Insurance:-
As the name amplifies insurance policies which deal with dental problems.
e) Mental Health Insurance:-
Mental health insurance pays for psychiatric care & counseling (guiding).
2. Life Insurance:-
Firstly “burial policies” were introduced to help to cover funeral expenses but life
insurance means to protect the family from the loss of the worker’s income. Life
insurance is designed to cover the death & offers financial protection to the
dependents (family) incase of death of the insured.
Life insurance is defined as “a contract where by the insurer in consideration of a
premium paid in lump sum or in periodic installments undertakes to pay a
specified sum either on the death of the insured or on the expiry of specified
number of years in the policy.”
3. Disability Insurance:-
Disability insurances are meant to compensate employees if they become disable or
they are unable to work.
Disability insurances may be either for short term or long term disabilities:-
1) Short Term Disability (STD):
Providing a partial replacement of wages & salaries for up to six months or year.
I.e. For accident & sickness or payment for pregnant women.
3. Security Benefits:-
Following are some ways to provide security benefits to the employees:-
1) Employment Income security:-
The loss of a job holds potentially severe economic consequences for an
employee which can be solved by employer provided benefits, like
Severance Pay:-
These benefits entitle the worker to pay a lump-sum payment at the time of
separation from the company.
Golden Parachutes:-
It is an agreement by a company to compensate executives with bonuses & benefits, if
they are displaced by merger or acquisition.
2) Retirement Security:-
Retirement plans are designed to reward long-service employees.
Developing a Retirement plan:
For the purpose of developing a retirement plan some important questions must
answered:-
Q: Who develops retirement plan? Answer is HR Department.
Q: Who will pay for it? Answer is that it depends on HR Plans followed:-
1. Non-Contributory Plan:-
The employer pays the entire amount.
2. Contributory plan:-
Contributory plan requires both employee and employer to contribute.
Q: When the pension rights will vest (when employee becomes eligible)?
Ans: Pension rights usually vest after several years of service.
Q: How will firm meet its financial obligations?
Ans: Most companies pay pension out of current income when employees retire.
b) Retirement counseling:-
The primary purpose of pre-retirement counseling is to encourage an
employee to plan for retirement emotionally & financially.
3. Time-Off Benefits:-
These benefits provide rest from the physical and mental effort of a job to
increase employee productivity.
Time-Off benefits include:-
4) Leaves of Absence:-
Leaves of absence are often granted for pregnancy, extended illness, funeral
service and accidents and other reasons in a company HR Policies.
Extended Leaves…………Given without pay.
Shorter Leaves…………...Granted with pay.
Example:-
Employees are entitled to a leave to take care of baby including birth, adoption
& placement of child in foster care. <Or>
Employees in serious health condition & are unable to work or when there is a
need for the employee to take care of spouse, parent or children with a serious
health condition.
3) Job Sharing:-
“Job sharing involves one or more employees doing the same job but working
different hours, days or even weeks.”
Mostly two people handle the duties of one full-time job.
Example: - General example of Doctors / Nurses Shifting Duties etc…….
Major Types of Services:-
Some companies go beyond pay and traditional benefits & provide services to their
employees. The most common ones are Educational, Financial & Social services:-
1) Educational Assistance:-
These programs are especially designed for employees for furthering their
education but may be limited to courses that are related to an employees job.
2) Financial Services:-
Financial services can be offered to employees in the form of “Discount
Plan” which allow workers to buy products from the company at a discount.
Example:-
Discount plans are common among retailer Stores & consumer goods
Manufacturers.
3) Social Services:-
A wide range of services are provided by employers as they adapt to a
changing & diverse work force.
At one Extreme are simple interest groups such as Cricket Teams, Bowling Leagues
etc.
At the other extreme are comprehensive employee assistance programs (EAPs)
designed to help employees with personal problem ranging from drug & alcohol
issues to other family problems dealing with employees. Such as given below……..
a) Child Care:-
Programs are offered to working mothers to look after and or to
take care of children.
b) Elder Care:-
Elderly (old) presents a special problem because of limited day care options
available to their working children.
c) Relocation Programs:-
It includes payment for moving expenses to new location, To reduce stress
of the employees.
References:-