COM PENSATION POLICY
LESSON 28: COM PENSATION POLICY
Supply and demand through the commodity approach to labor, controlled entry into apprenticeship programs. All
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as discussed earlier, is not completely correct, it is nevertheless compensation must come from products sold in a market that
true that a wage is a price for the services of a human being. The
is usually competitive in nature.
firm desires these services, and it must pay a price that will bring
Inequitable compensation to any or all will create trouble in
forth the supply, which is controlled by the individual worker or
maintaining the health of the organization. The increase in the
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by a group of workers acting in concert. strength of labor unions is due, in part; to the fact the
The primary practical result of the operation of this law of employees’ interests had not been receiving attention equal to
supply and demand is the creation of the “going-wage rate.” It that given to other components of the enterprise.
will be demonstrated later how the wage and salary survey of
The impact of this strength is shown in Figure 12-1. In the six
this going rate is incorporated into a job evaluation approach to highest-paying industries, approximately half of the full-time E
wage determination. We shall discuss the charges of certain workers are organized. In the six lowest-paying industries, only
groups that the market going rate reflects fundamental biases
14 per cent are recognized. It should also be noted that the
towards female employees. percentage of female employees is lowest among the highest- This simple statement of the effect that the demand and supply
paying industries.
of labor have on wages belies its complexity. It is not practicable Ability to pay Labor unions have often demanded an increase in to draw demand-and-supply curves for each job in an
compensation on the basis that the firm is prosperous and able organization, even though, theoretically, a separate curve exists
to pay. However, the fundamental determinants of the wage for each job.
rate for the individual firm issue from supply and demand. But in general, if anything works to decrease the supply of
If the firm is marginal and cannot afford to pay competitive labor, such as restriction by a particular labor union, there will be
rates, its employees will generally leave it for better-paying jobs.
a tendency to increase the compensation,. If anything works to Admittedly, this adjustment is neither immediate nor perfect increase the employer’s demand for labor, such as wartime
because of problems of labor immobility and lack of perfect prosperity, there will be a tendency to increase the
knowledge of alternatives.
compensation. If the firm is highly successful, there is little need to pay far
The reverse of each situation is likely to result in a decrease in more than the competitive rate to obtain personnel. Such a employee compensation, provided other factors, such as those
firm, however, may choose to adopt a policy of paying above discussed below, do not intervene.
the competitive rate in order to attract a superior calibre of
F igure 12-1
personnel. If firms in general are prosperous and able to pay,
Labor Union and E arnings
the tendency is to bid up the price of labor as a whole. Productivity Beginning with the famed General Motors
Contract with the United Automobile Workers (UAW) in 1948,
Median Weekly
Percent
Percent Who
E arnings
Represented by
are Women
much attention has been paid to the effect of general
a Union
29 39 productivity increases in the economy upon the specific
All full-time workers $289
Highest-paying industries
compensation of huge aggregations of employees.
Petroleum and coal 433
products
In the battle against inflation, representatives of the federal
Mining 423
82 7 government have attempted to use computed productivity
Railroad transportation 422
Aircraft and parts 414
50 23 gains as guidelines in the settlement of wage disputes between
manufacture Ordnance
37 22 managements and unions. Between 1947 and 1966, the
Motor vehicle and 407
63 15 computed average annual productivity increases in
equipment manufacture Lowest-paying industries
1 90 manufacturing was set at 2.9 per cent, leading to the
Private households 170
8 55 establishment of a ‘no inflationary’ guideline for wage increases
Apparel manufacture 174
E ating and drinking places 185
24 61 of 3.2 percent.
Leather and leather products 188
Personal services 189
4 16 With growing inflation, resulting briefly in short-term wage and
Agriculture
price controls, the validity of this guideline suddenly vanished. With inflation reaching double
Labor Unions In the structure of economic relationships, the digit levels, the government approach of “jawboning” to labor union attempts to work primarily on the supply side.
influence negotiated settlements has been placed under serious handicaps.
In a strike for higher wages, the employer’s demand for labor to meet a market need is pitted against a supply withheld by the
An even more serious problem is that the average annual union. Union leaders are often very adroit in selecting the
productivity increase in the United States during a recent 11-year appropriate time to strike as judged by the markets for the
period has sunk to 1.9 percent as compared with 9 percent In employer’s products.
Japan, 5.5 percent.
To strengthen their control over the supply of labor, unions In West Germany, 5.1 percent in France, and 2.8 percent in Great seek such goals as union or closed shops, regulated or restricted
Britain.2 During this same period, however, hourly pay has substitution of capital for labor through technology, and
increased over 100 percent. A part of this problem of pay
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speedup and productivity slowdown is characteristic of a
Equity and Compensation
maturing economy; service businesses now account for 70 If our first goal of attracting capable employees to the
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percent of an jobs. Productivity advances in services are more organization is to be achieved. personnel must perceive that the S A difficult to effect than in manufacturing.
compensation offered is fair and equitable. E quity is concerned
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Though some have hailed the widespread use of productivity with felt justice according to natural law or right.
M Homans’s exchange theory predicts greater feelings of equity
index as a major breakthrough in compensation, these are
A several serious drawbacks to its use. Among these are the between people whose exchanges are in equilibrium. When an
following: employee receives compensation from the employer,
G (1) there is no precise and accurate measure of productivity perceptions of equity are affected by two factor: M E acceptable to all;
1. the ratio of compensation to one’s inputs of fort, education.
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(2) the reported percent increases are generally a long-term training, endurance of adverse working conditions, and so
average and are not achieved each year;
on.
(3) not all industries participate equally in productivity gains and
2. the comparison of this ratio with the perceived ratios of significant other people with whom direct contact is made.
(4) use of any index does not materially reduce controversy in
E quity usually exists when a person perceives that the ratio bargaining since the index is used as the base from which to of outcomes to inputs is in equilibrium both internally with bargain. respect to self and in relation to others.
Cost of Living
In Figure 12-2, nine different situations are proposed. E quity Another formula hailed by many as the answer is the cost-of-
theory would hypothesize that the correlation of pay and living adjustment of wages. Among the problems engendered
contribution that exists in cells 3, 5, and 7 would result in by this approach are the following:
feelings of equity. In all other cells, feelings of dissonance are (1) no cost-of-living formula will indicate what the base
likely to exist. Research conducted with respect to under-reward compensation should be- it merely indicates how that rate
situations (6, 8, and 9) clearly indicates that employee should vary;
satisfaction is lower than in either the equity or over-reward (2) this approach tends to vary monetary income but freeze real
situations.
E mployee contributions exceed their outcomes of money. (3) as in the case of productivity indexes, there are certain
income, a result with which labor is not content; and
Resulting dissatisfaction often leads to efforts to reestablish measurement problems in ascertaining cost-of-living
equilibrium, such as “borrowing” from the supply room to increases. The Consumer Price Index of the Bureau of Labor
increase rewards, trying to adversely affect the effort and pay of Statistics, however, is widely accepted and followed by many’
others, convincing self that pay is not out of line, quitting or employers and labor organizations.
frequently absenting oneself from the organization, promoting Cost-of-living adjustment of compensation constitutes no
labor organization, and so on.
fundamental solution to equitable compensation to employees. Concerning the over-reward situations (cells I, 2, and 4), original It is useful as a stopgap device in times of inflation when labor
research conducted by Adams suggested-that feelings of is pressed to keep up with the rise In prices.
discomfort and guilt resulting from inequitably higher pay It is an essential ingredient of long-term labor contracts unless
would lead-.to actions to reduce dissonance. He led an provision is made to reopen the wage clause periodically. The
experimental group of employees to believe that the pay United Auto Workers agreement, for example, provides for
allocated was significantly in excess of their qualifications. quarterly cost-of-living adjustments amounting to a I-cent
F igure 12.2. E quity in Compensation
increase for every 0,3 percent advance in the Consumer Price Index.
Gross
moderated
Government
Over reward
over award
Equity Our varying levels of government often have very specific things
(3) to say about wages and salaries despite the theoretical and
moderate nebulous nature of equitable compensation. There are at least
Moderated
under reward three major federal laws that deal directly with the subject of
Over reward
E mployees assigned to executive, administrative, or professional positions are usually excluded from coverage by the
Moderate under reward gross act. Labor organizations constantly press for increases in the
Under reward minimum wage, decreases in the standard workweek, and
Equity
increases in the penalty for overtime hours, all in the interest of (9)
increasing total compensation for labor. (output background etc) ( line of equity)
In one experiment, the overpaid group, compensated on an
Assignm ent
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hourly basis, produced a quantity significantly in excess of an
1. Try to find out the various measures taken by Government
appropriately paid control group. In a second experiment under
of India for providing Minimum wages.
a system of incentive piecework, the overpaid group tended to
reduce dissonance by restricting output so that total pay was
Notes
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more in line with equity expectations. And in a final experiment,
the overpaid group restricted its quantity but increased its
quality in order that total pay received might be in line with
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contributions.
Other research has not demonstrated the same strength of
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impact upon an overpaid group as for an underpaid one. For
example, a second study supported hypotheses with respect to
underpaid personnel; they tended to decrease inputs over a period of time in comparison with those equitably paid as well as with those overpaid.
The overpaid group however, tended to parallel the equity group in output. Concerning satisfaction, however. overpaid did express more overall dissatisfaction than did those from equitably paid groups. Thus, there is some indication of guilt from receiving more compensation than deserved, but such feelings were not translated into action.
It has been observed that many organizations pursue a pay increase policy characterized by cells 4, 5, and 6. The employee of average contribution is accorded an average’
increase in pay, but those above and below average are allocated compensation amounts not significantly different.
Thus superior personnel are moderately under-rewarded, leading to lower contributions or withdrawal from the firm. Inferior personnel are moderately over-rewarded, leading to little or no change in behavior but effecting acceptable levels of employee satisfaction.
It is this condition that led Herzberg to conclude that pay cannot be; an effective motivator of employee behavior. 10 Figure 12-2 and equity theory would suggest that the problem may be one of improper design of compensation systems, rather than the fundamental inability of pay to motivate.
To cope with possible feelings of inequity, various organizations follow a practice of imposing secrecy with respect to compensation received. This is particularly true for salaries of executives and other personnel not covered by union contracts. Research has shown that personnel often underestimate pay of higher-level managers and overestimate the pay of both peers and those one level below.
Thus even if conditions exist that would favor equity, it will not
be perceived if compensation is kept secret. On the other hand, if a firm desires to “go public” with its salaries, it had better be able to evaluate performance levels in an objective manner. There are many situations where job outputs are both intangible and intertwined in a dependent fashion with other jobs.
Unless some form of acceptable objective assessment can be developed, public pay systems may well lead to lower performance and morale, accompanied by strained relationships between superiors and subordinates.
A Case St udy On Teri Rew ards Corporat e Ef f ort s
The annual awards recognise the efforts of corporates in environmental management and sustainable initiatives
In order to encourage environmental management and protection in the corporate sector, TE RI instituted the Corporate E nvironmental Awards last year. E ncouraged by the response and interest shown by corporates, TE RI has decided to confer the awards annually.
The objective of the awards is to recognise the leadership efforts of corporates in environmental management and sustainable initiatives, recognise innovative practices that promote sustainable development and further encourage and provide momentum to environmental initiatives.
The awards are divided into three categories: Category 1: companies with a turnover of less than or equal to Rs 100 crore per annum; Category II: companies with a turnover of between Rs 100 crore and Rs 500 crore per annum; and Category III: companies with a turnover above or equal to Rs 500 crore per annum. The application fee for category I is Rs 500 per application; category II, Rs 2,000, and category III, Rs 5,000.
Says R K Pachauri, director general, TE RI, “The TE RI Corporate E nvironmental Awards help corporates and Indian society in general in two major ways. Firstly, the awards recognise good practices and excellence in protecting the environment on the part of deserving corporate organisations. Secondly, the awards help to focus on the responsibility of business in protecting the environment and conserving our natural resources.
E ven those organisations that do not participate in the process will get to know about these awards and feel motivated to do their bit in the same cause. Overall, these awards will help to prepare businesses for the coming era when the corporate sector will have to face very stringent environmental standards to be imposed by the public at large and governments in particular. The bottomline of a company that prepares effectively for such
a future will be healthier than that of one that does not.” Out of 110 applications received by TE RI this year, 18
companies were shortlisted and the final awards will be given on June 17. The selection of the awards are based on a questionnaire filled by the company and a case study on the environmental initiative undertaken. After shortlisting the companies, experts from TE RI visit the site to check on the authenticity of the environmental initiative.
The case studies were evaluated on the basis of a few pre-set parameters, like pollution prevention-proactive practices, process improvements and modifications undertaken resulting in environmental improvement, waste reduction and energy or resource conservation.
Scientific research and technological innovation-research or technological innovations that have been implemented or demonstrated for addressing environmental issues.
E nvironmental benefits-success and effectiveness of the programme, both in terms of environmental and economic benefits. Potential model for business commitment-the replicability or transferability of the practices, outcomes or experience of the project.
The jury members for selecting the awards are Justice J S Verma, former-chairperson, National Human Rights Commission and former chief justice of India; Vishwanath Anand, vice- chairperson, National E nvironment Appellate Authority; Suman K Bery, director-general, National Council of Applied
E conomic Research; Sanjaya Baru, chief editor,The Financial
E xpress; and R K Pachauri, director general, TE RI. In Category I, five companies were shortlisted: M K E lectric;
Chemfab Alakalis Ltd; Shriram Alkali and Chemicals; The Orchid—An E cotel Hotel and Hitech Arai.
In Category II, five companies were shortlisted: Andhra Paper Mills Ltd; Sanghi Spinners India Ltd; Shree Cements Ltd; Star Paper Mills Ltd and Samcor Glass Ltd.
In Category III, eight cases were shortlisted: Orient Paper Mills; Grasim Industries Ltd; Bharat Petroleum Corp. Ltd; Hindustan Lever Ltd; Chennai Petroleum Corp. Ltd; Harihar Polyfibres; Hindalco Industries Ltd and Hero Honda Motors Ltd.
How are the TE RI Corporate E nvironmental Awards different from other similar awards? Mr Pachauri explains, “I am not aware of any other award dealing with environmental performance where such rigorous evaluation and objective scrutiny is carried out in determining the winner.
Not only is the technical and economic evaluation of each entry carried out by a team of researchers from TE RI, but the final decision is taken by a very eminent panel of judges chaired by a former chief justice of India. It is the result of the objectivity and rigour of the process that has given these awards the prominence they have attained in a short period of time.
Another feature of the award, which is worth mentioning, is the subdivision of companies on the basis of turnover. Hence, the performance of a small unit is not evaluated against that of
a large enterprise, which may have very different managerial and technological capabilities. The awards are differentiated on the basis of size of the enterprise.”
Last year, TE RI received some 89 entries; this year, it is 110. Mr Pachauri does not think the numbers are low. “Firstly, a jump of over 25 per cent in the entries received in merely a year is a very encouraging development, but the figure of 110 entries consists of very serious contenders. We accept entries only with
a modest processing fee. This eliminates those who may not be serious and those who have only trivial achievements to claim.