Finance for HR Professionals

and
Compensation Management
(As per the Revised Syllabus 2016-17 of Mumbai University
for T.Y.BMS, Semester V)

Deepali Vijay Kamle

MBA (Marketing), B.Com. (Management)
BMS Coordinator,
Tolani College of Commerce, Andheri (East).

Tushar Agarwal
SET, Ph.D. Scholar, MBA (Marketing),
MBA (Corporate Governance), M.Com. (Management),
BMS Coordinator,
Chandrabhan Sharma College of Arts, Science & Commerce, Powai

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 Preface
We would like to thank our family, friends and students without
their support and encouragement; we would not have been able to
achieve this feat.
Special thanks to S.K. Srivastava of M/s Himalaya Publishing
House Pvt. Ltd.
It is a matter of great pleasure to hand over First edition of this
book on “Finance for HR Professionals and Compensation
Management” to the students of T.Y. BMS course started by University
of Mumbai.
The objective of the book is to orient students with financial
concepts used making HR decisions and also to understand various
compensation plans. Today, we need to be aware on issues related to
compensation management and understand the legal framework of
compensation management.
We have tried to make and present the book in simple and lucid
language.

Authors
 Syllabus
Finance for HR Professionals and
Compensation Management
Course Code: UBMSFSV.12
Learning Objectives:
1. To orient HR professionals with financial concepts to enable them to
make prudent HR decisions
2. To understand the various compensation plans
3. To study the issues related to compensation management and
understand the legal framework of compensation management

Unit No. Modules/Units

Unit 1 Compensation Plans and HR Professionals
 Meaning, Objectives of Compensation Plans, Role of HR
Professionals in Compensation Plans, Types of Compensation:
Financial and Non-financial, Factors Influencing
Compensation.
 Compensation Tools: Job-based and Skill-based, Models:
Distributive Justice Model and Labour Market Model,
Dimensions of Compensation.
 3Ps Compensation: Concept, Benefits of Compensation:
Personal, Health and Safety, Welfare, Social Security.
 Pay Structure: Meaning, Features, Factors, Designing the
Compensation System, Compensation Scenario in India.

Unit 2 Incentives and Wages

 Incentive Plans: Meaning and Types: Piecework, Team,
Incentives for Managers and Executives, Salespeople, Merit
Pay, Scanlon Pay, Profit Sharing Plan, ESOP, Gain Sharing,
Earning at Risk Plan, Technology and Incentives. Prerequisites
of an Effective Incentive System.
 Wage Differentials: Concepts, Factors Contributing to Wage
Differentials, Types of Wage Differentials, Importance of
Wage Differentials, Elements of a Good Wage Plan.
 Theories of Wages: Subsistence Theory, Wage Fund Theory,
Marginal Productivity Theory, Residual Claimant Theory and
Bargaining Theory.
Unit 3 Compensation to Special Groups and Recent Trends
 Compensation for Special Groups: Team-based Pay,
Remunerating Professionals, Contract Employees, Corporate
Directors, CEOs, Expatriates and Executives.
 Human Resource Accounting – Meaning, Features, Objectives
and Methods.
 Recent Trends: Golden Parachutes, e-Compensation, Salary
Progression Curve, Competency- and Skill-based, Broad
Banding and New Pay, Cafeteria Approach – Features,
Advantages and Disadvantages.

Unit 4 Legal and Ethical Issues in Compensation

 Legal Framework of Compensation in India: Wage Policy in India,
Payment of Bonus Act 1965, Equal Remuneration Act 1976,
Payment of Wages Act 1936, Payment of Gratuity Act 1972,
Employee Compensation Act 1923, Employees’ Provident Funds
and Miscellaneous Provision Act 1952.
 Pay Commissions: Wage Boards, Adjudication, Legal
Considerations, COBRA Requirement, Pay Restructuring in
Mergers and Acquisitions, Current Issues and Challenges in
Compensation Management, Ethics in Compensation Management.
 Question Paper Pattern
Duration: 2.5 Hours 75 Marks
N.B.: 5 questions of 15 marks each.
All questions are compulsory.

Q.1. Attempt any 2

(a) 7.5 Marks
(b) 7.5 Marks
(c) 7.5 Marks

Q.2. Attempt any 2

(a) 7.5 Marks
(b) 7.5 Marks
(c) 7.5 Marks

Q.3. Attempt any 2

(a) 7.5 Marks
(b) 7.5 Marks
(c) 7.5 Marks

Q.4. Attempt any 2

(a) 7.5 Marks
(b) 7.5 Marks
(c) 7.5 Marks

Q.5. Case Study 15 Marks

 Contents
Chapter Name Page
No. No.

Unit I: Compensation Plans and HR Professionals

1 Compensation Plans 1–8

2 Compensation Tools 9 – 16

3 3Ps of Compensation 17 – 22

4 Pay Structure 23 – 30

Unit II: Incentives and Wages

5 Incentive Plans 31 – 36

6 Wage Differentials 37 – 39

7 Theories of Wages 40 – 44

Unit III: Compensation to Special Groups and

Recent Trends
8 Compensation for Special Groups 45 – 54

9 Human Resource Accounting (HRA) 55 – 60

10 Recent Trends 61 – 73

Unit IV: Legal and Ethical Issues in Compensation

11 Legal Framework of Compensation in India 74 – 86

12 Pay Commissions 87 – 96

Case Studies 97 – 103

References 104
 Unit I
Compensation Plans and HR Professionals

CHAPTER

Compensation Plans
1

Meaning
Today, to remain competitive, companies need to develop the
reward packages that satisfy the employees. These reward packages are
the combination of monetary as well as non-monetary rewards. The
main objective of working on the reward packages is to attract, motivate
and retain employees. The success of a pay system depends on the
linking of organisational objectives and strategies to compensation so
that individuals could be encouraged to work in a manner which will
gain maximum benefits for the company and stakeholders. The effective
reward approach to pay depends on the interest, cost, needs and
expectations of the employees and employers.

Total Rewards

Performance and
Compensation Benefits Talent
Management

Base Pay: 1. Health/Medical 1. Performance

Wages, Salaries Insurance Appraisals
2. Life/Disability 2. Goal Setting
Insurance 3. Training
Variable Pay:
3. Retirement 4. Human Resource
Bonuses, Incentives,
Pension Plans Development
Stock Options
4. Educational 5. Career and
Assistance Succession Planing
5. Work-life Support
2 Finance for HR Professionals and Compensation Management

One of the most difficult functions of personnel management is

that of determining the monetary compensation. The term compensation
mainly refers to 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. Compensation could be more clearly expressed as the
package in the form of a financial reward offered to an employee – in
the form of wages, salaries, bonus, commission and other indirect
monetary benefits offered to an employee for the services performed by
them. Compensation encompasses all rewards or payments – tangible or
intangible, monetary or non-monetary and physical and psychological –
that an organisation provides to its employees on exchange for the work
done.

Objectives of Compensation Plans

The compensation programme is formulated by every organisation.
Even a company with handful of employees will also formulate the
compensation plan. While designing the compensation programme, it is
very important to consider various factors which could affect its
implementation. Any compensation programme must satisfy three basic
objectives. They are:
 To attract the sufficient number of qualified candidates so that
the best could be selected.
 To retain the efficient employees so that the turnover and
resource productivity could be enhanced.
 To motivate the employees to perform to the fullest of their
capabilities.
Patton suggested that, in compensation policy, there are seven
criteria for effectiveness. Compensation should be:
1. Adequate: The compensation should meet the minimal level as
set by government, union and managerial positions.
2. Equitable: The organisation needs to ensure that every person
should be paid fairly, in line with his or her effort, abilities and
training.
3. Balanced: The pay, benefits and rewards should provide a
reasonable total reward package.
Compensation Plans 3

4. Cost-effective: It is necessary for the organisation to ensure

that the reward should not be too excessive, considering to
what an organisation can afford to pay.
5. Secure: Pay should be enough to help an employee feel
secured and should help him in satisfying his basic needs.
6. Incentive providing: A compensation plan should consider the
different incentives which will motivate employee to perform
best at work.
7. Acceptable to employees: It is important that the
compensation plan should be acceptable to the employees. At
least, it should be enough to satisfy their basic requirements.

Role of HR in Compensation Plans

The term human resources implies that people have the capabilities
that drives organisational performance along with other resources like
machinery, money, materials and information. Human resource
management is designing management systems to ensure that human
talent is used effectively and efficiently to accomplish the organisation
goals. HR professionals perform variety of roles. They perform
functions at strategic level, EEO (Equal Employment Opportunity),
staffing, ensures employee and labour relations with management, risk
management and worker participation, rewards and compensation, talent
management, etc. The focus of study at this stage is on the role of HR
professionals in compensation management.
Following are the roles performed by a HR professional:
1. Develop a programme outline: As a part of compensation
plan, a HR professional will design a programme outline which
very clearly will indicate the objective of the compensation
programme. They should clearly prescribe the process of how a
particular compensation strategy will be implemented or
executed by the organisation. The objectives will also consider
the budget allotted for a particular financial year on
compensation and rewards.
2. Develop a compensation philosophy: Compensation
philosophies can be developed considering two philosophy:
(i) entitlement philosophy and (ii) performance philosophy.
The entitlement philosophy assumes that individuals who have
4 Finance for HR Professionals and Compensation Management

worked another year are entitled to pay increases, with little

regard for performance differences. While performance
philosophy assume that compensation changes, if performance
changes. Organisations working under this philosophy do not
guarantee additional or increased compensation simply for
completing another year of service.
3. Conduct a job analysis of all positions: One of the most
important functions performed by the HR professional is to do
the job analysis of all the positions in a hierarchy. HR
executives gathers information from the senior departmental
heads of marketing, finance, sales, administration, production
and other appropriate departments to determine the
organisational structure and primary functions of each.
Interviewing the department managers and the employees who
actually executes it will be helpful in determining the specific
job functions. Develop a model of job descriptions which will
help in better evaluation of job.
4. Job evaluation: Job evaluation aims to determine a job’s
relative worth. The job evaluation is a formal and systematic
comparison of jobs to determine the worth of one job relative
to another. Rank the jobs within each senior vice president’s
and manager’s department, and then rank jobs between and
among departments. HR professional verifies the ranking by
comparing the industry market data and prepares the flowchart
of all ranks for each department for easy assessment and
interpretation of job.
5. Determine job grades: After job evaluation, jobs are further
classified into job grades by establishing various levels like
senior, junior, intermediate and beginners. HR executives at
this stage also determine the number of pay grades, or
monetary range of a position at a particular level, within each
department.
6. Determine an appropriate salary structure: Job grading
helps in classification of jobs which could further be helpful
designing a salary structure. Various components of a salary
structure is analysed with the market rates and company’s
philosophy. If it gets satisfied, then the compensation
Compensation Plans 5

committee reviews it, makes adjustments if required and goes

for further approval from top level management.
7. To obtain top executives’ approval of the basic salary
programme: After getting approval from HR committee, HR
department develops and presents the cost impact studies that
project the expense of bringing the present staff upto the
proposed levels or adding any compensation benefits into the
present salary structure.
8. Communicate the final programme to employees and
managers: Once the salary structure is approved and finalized
by compensation committee, HR Executives develop a plan for
communicating the new programme to employees using slide
shows or movies, literature, handouts, etc.; make presentations
to managers and employees; implement the programme; design
and develop detailed systems, procedures and forms; work with
HR information systems staff to establish effective
implementation procedures, to develop appropriate data input
forms, and to create effective monitoring reports for senior
managers; and execute the compensation programme.
9. Monitor the programme: Organisation’s objective of
effective compensation plan is to motivate employees to give
their best at work. HR monitors feedback from managers, make
changes where necessary, find flaws or problems in the
programme and adjust or modify where necessary.

Types of Compensation
Compensation to an employee could be direct or indirect. In direct
compensation, the employee gets rewards which are tangible. Employer
provides monetary rewards for the work done. While in case of indirect
compensation, the employer will praise the employee for the work done.
Any psychological or social forms of rewards are called as intrinsic
rewards or indirect compensation. Extrinsic reward mainly comprised of
both monetary and non-monetary rewards.
6 Finance for HR Professionals and Compensation Management

Compensation

Direct Compensation Indirect Compensation

(Financial) (Non-financial)

Base Pay and

Benefits
Variable Pay

1. Base Pay: The base pay is the basic compensation which an

employee receives in the form of a wage or a salary. It varies
from organisation to organisation to decide whether to pay
basic pay on hourly basis or salaried. Depending on the nature
of work, the category is decided. Hourly pay is based on time.
Hourly paid pay is the wages which are calculated on the basis
of time worked. While salaries are paid to the employees
irrespective of the number of hours worked, base pays are also
matched closely to the competition. It also considers
organisation’s ability to pay and the quality of talent to be hired.
Base pay acts as a base to the variable pay.
2. Variable Pay: Another form of direct compensation is
variable pay. The variable is paid to an individual or a team for
the outstanding organisational performance. The variable pay
could be paid by the organisation in the form of bonuses or
ESOPs (employee stock options). A variable pay will always
be linked to employee or team performances. Therefore, it is
flexible and links to the future of the firm and the employee in
a positive manner.
3. Benefits: The indirect form of compensation is benefits.
Benefits mainly comprised of heath benefits and fringe benefits
(vacation pay, health insurance, etc). The benefits are
regardless of the performances. It is the tangible value received
without receiving cash.

Factors Influencing Compensation

Though a considerable amount of care is taken while designing a
compensation plan, but still there are various factors which influence the
Compensation Plans 7

compensation and pay policies. These factors could be classified into

external factors and internal factors. External factors are those factors
which are outside the organisation and have uncontrollable factors.
While internal factors are the factors which are inside the organisation
and are controllable, they can be changed as and when the external
factors changes.

External Factors Influencing Compensation

1. Demand and supply: A wage or a salary is the price paid for
the services performed by the people. The firm deserves these
services and therefore, it is desirable that they must pay the
price which will help to attract, retain and satisfy an individual
working for the organisation. The compensation is regulated by
the forces such as demand and supply. Pay may be higher if
few skilled employees are available. Not only this, but the
demand for highly skilled and qualified employee will attract
high salaries. While in reverse situation, it could be lower.
2. Economic conditions and compensation: The industry
economic condition also affects the compensation. More the
competitive industry, the less able the organisation is to pay
higher wages. The productivity could also help in higher wages.
Productivity can be increased through various means like using
advanced technology, training, efficient operating methods, etc.
3. Government influences and compensation: The government
affects the compensation plans directly. Any changes in wage
guidelines could affect the compensation plan. At different
levels, government have very specific things to say about
wages and salaries. Equal pay wages, hourly wage regulations,
minimum wage, overtime pay, child labour, etc. are amended
time and again to do justice to the services given by the
employee. And at the same time, employer’s objective is also
considered when policies related to wages and salaries are
designed.
4. Union influences and compensation: Unions have influenced
compensation plans of the organisation many a times in the
past. Unions have an effect whether or not the organisation’s
employees are unionised. The union demands for a higher
8 Finance for HR Professionals and Compensation Management

wages when they are aware of the ability of the organisation to

pay.

Internal Factors Influencing Compensation

1. Labour budget: It mainly identifies the amount of money
available for annual employee compensation. A firm’s budget
generally reflects the entire amount allocated to a particular
division or a unit. It is dependent on the external influence.
Any change could lead to change in labour budget.
2. Motivation and compensation: A well designed compensation
plan will motivate employees to contribute to the best of their
abilities. Motivation is the inner state that energises human
goal oriented behaviour. Since different things motivate
different individuals, this makes designing of compensation
plan complicated and difficult. It is, therefore, important to
analyse the employee satisfaction and productivity while
deciding on the compensation plan.

Questions
1. What do you understand by Compensation Plan? Discuss the
different types of compensation plans.
2. Mention various factors influencing the compensation planning
of any organisation.
3. What is the role of HR professional in compensation planning?
4. Write notes on:
(a) Financial Compensation
(b) Non-financial Compensation
(c) Base Pay
(d) Variable Pay

____