One of the most difficult functions of human resource management is that of determining the rates of monetary compensation. It is not only complex, but significant both to the organization and employees. Employee compensation decisions are crucial for the success of an organization. From a cost perspective alone, effective management of employee compensation is critical because of the total operating costs.
Another reason for studying compensation from the organization’s perspective is to assess its impact on a wide range of employee attitudes and behaviors and, ultimately the effectiveness of the organization and its units. Compensation may directly influence key outcomes like job satisfaction, attraction, retention, performance, skill acquisition, cooperation, and flexibility. (Backman J. ,Wage Administration: An Analysis of Wage Criteria,) Professional Employer Organizations (PEO) has a very active and critical role to play.
There is the broad question of the determinants of compensation relationships. This involves an understanding of various influences controlling compensation, the nature of decision-making bodies and the different traditions and customary attitudes that have developed in individual firms or industries in some cases, the controlling influences may be standards and more of a particular locality or region, sudden change in technology, source of labor supply, firm’s competitive standing, and general sales-and-profits prospects of the industry.
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A decision about compensation rates in a given situation has to be reconciled With a variety of considerations such as when pay rates should be changed and by how much, how they should be distributed among the different employees, and what firms should be covered. Disputes between employers and unions over wages and salaries are often a part and parcel of conflicts over such diversified matters. (Beach, D. S. ,The Management of People at Work) PEO’s have to formulate a pay package and the quantum of take-home pay that is the net packet, after an employee has paid for his deductions.
Some of these deductions are savings for old age, like the retirement fund and pension schemes. The balance between what is received now and what he will get on retirement is something that is variable in each case. In an employee’s earlier years, normally children’s education, medical treatment, recreation will necessitate a larger income. In his later years an employee will need to provide for his old age, in terms of a house and a steady income to maintain his habituated life style. Another related issue is salary and tax planning.
In this context, organizations have taken recourse to fringe benefits, some of which are taxable. PEO’s have studied these factors in detail before the person is employed. The incidence of tax, either on money incomes or on the total taxable income including perquisites, has to be worked out to help manage the risk of organizations. (Bowey A. M. , Handbook of Salary and Wage Systems) 2 Why not just do what a PEO does ‘in house”? Organizations have to make a survey of collecting data and facts about compensation policies, practices and programmes of companies in some related markets.
It provides information that has many uses. This information is particularly relevant to the problem of establishing and adjusting salary levels. It may also be used to validate the compensation structure. The objectives of compensation survey vary from one organization to another. Before conducting a compensation survey, an organization should study the compensation data that may be available. If such information is not available, a company may either conduct its own survey or participate with other organizations. (Wayne F. Cascio, Werther W. W. , Davis K., and Elios M. Awa, Human Resources and Personnel Management)
The data collected through survey should include not only information on the key jobs and their comparability to the surveyed organization’s jobs but also information on benefits, bonuses, and other methods of compensation besides direct salary. Failure to include these factors would give a distorted picture of the total compensation package offered. It is also useful to collect information on the characteristic of the organization to determine how similar the organization is to the one surveyed.
In either case, great care must be given to compensation survey procedures. (Bowey A. M. ,Handbook of Salary and Wage Systems) Conducting a compensation survey is a complex, costly and time-consuming process. For this reason, employers should thoroughly examine existing compensation surveys before planning to conduct one of their own. Before deciding to use an existing standard survey, an employer should consider a number of factors. First, will the survey provide information to suit the organization’s needs? If one survey does not meet an employer’s needs, perhaps several surveys will provide the needed information.
Second, how representative are the surveyed organizations of those with which an employer wishes to make pay comparisons? Third does the existing survey provide sufficiently detailed job descriptions to permit detailed comparison with jobs in one’s organization? (Beach, D. S. , The Management of People at Work, Macmillan) PEO’s are well acquainted in this field and they are having the requisite data for various industries as they take the risk of employing qualified persons. It may not be possible for any organization to go in such detail information of employee compensation and the consequent risk involved.