Direct_and_Indirect_Compensation

Managing Human Capital Table of contents 1. Introduction 2. Literature review 3. Critical analysis 4. Conclusion ₺If Employees undervalue the cost of benefits, why should a company not drop benefits and simply add more direct compensation₺. Do you agree or disagree with this statement' Explain using relevant organisational examples. Organizations need motivated employees and a key motivator for them is compensation. Competent people can only be acquired by organization if it is offering good salary and other rewards and benefits to compensate employee’s creativity and abilities. Human resource department is continuously working to develop excellent reward packages to get best out of employees’ skills and talents. Compensation package is most important tool to enhance motivational level of employees. Business is standing on four pillars of Ms, i.e. men, material, machine and money and men is most considerable factor without which organization cannot go forward. These four Ms contribute in the procedures of organization and in return to their contribution, they need return. Compensation and benefits are given to employees as a return to their services. People seek good employment just to receive better and competent compensation. Compensation package not only to fulfil materialistic needs and requirements, it also fulfil other needs like social needs or self esteem needs. If employees are not satisfied from organization compensation system then they try to leave organization or if they are new then they reject the job offer from such organizations. To develop competitive packages for employees, organizations add direct and indirect compensation in salary package. Both of these are essential parts of compensation package. Monetary benefits which are given to employees in return to their services are known as direct compensation. Usually, direct compensation includes salary, allowances and bonuses which are given directly to employee. This covers basic needs of employee such as survival, security of job and recognition. In Maslow’s Hierarchy of Needs, these are lower level needs which can be fulfilled by financial rewards. Indirect compensation includes non-monetary benefits and rewards given to employees such as leave policy, overtime policy, car policy, insurance and retirement benefits. Indirect compensation is used to fulfil psychological needs such as satisfaction from job, accomplishing job challenges, social interaction and enjoyment at workplace. Conveyance Leave Travel Allowance Direct Compensation Basic Salary House rent Allowance Special Allowance Medical Reimbursement Bonus Insurance Retirement Benefits Indirect Compensation Leave Policy Overtime Policy Hospitalization Holiday guest house Flexible timings To fulfil the needs of employees, direct remuneration and indirect remuneration have become important elements of competitive reward system. All organizations are striving to develop best package so that they can attract talented and skilful workers. Ever changing requirements of jobs have led the organization to give reasonable and fair compensation package to employees. Employees expect to get fair compensation package from their organization. As labour helps management to achieve goals and objectives of organization so they have to keep them satisfied by providing reasonable share from organization’s profits. A good reward system helps organization to increase the efficiency and productivity of its employees. It motivates them to give best output to achieve organizational goals. A fair remuneration system can create loyalty among employees as organization is helping them to develop their careers by providing growth opportunities. It will minimize the turnover rate and organization can recruit and retain best employees. As there are so many advantages to develop fair remuneration system for employees, organizations need to work on their compensation packages by adding both direct and indirect rewards. Literature review: In past, employees used to work hard to get good salary, salary increments and promotions on yearly basis. Some of the firms provided good salary with retirement benefits to their employees. It was believed that people work just to get monetary rewards and there were no intrinsic rewards to cover other social and psychological needs. With the advent of behavioural science theories, employees became aware of their rights and they started demanding more compensation from their employers. At that time, Maslow gave his theory hierarchy of needs to change the assumption that employee only work for money. He argued that there are other needs such as self actualization, esteem needs and social needs which need to be fulfilled to increase the level of satisfaction. This theory increased the value of employees and for the purpose of their satisfaction separate human resource department was developed to work for the well being of employees. According to the Maslow’s hierarchy of needs there are five levels of needs which can be fulfilled to increase level of motivation of employees. He said that a person starts to seek needs which are in the bottom of pyramid, once his first level needs have been satisfied then he moves to next level. If still organization is providing compensation to fulfil first level needs then it cannot increase the motivational level because needs are still unmet. He suggested that to motivate your human resources, you need to know the needs of your employees. If the manager is aware of employees’ needs then he can give appropriate rewards in return to their services. The hierarchy of needs by Maslow can be seen in the pyramid provided below. Organizations are offering intrinsic and extrinsic rewards to recruit and retain best employees in the competitive environment where everything is changing. Innovative reward systems are offered to employees so that talented and competent work force can be attracted. You can only influence the employee attitude and behaviour by providing him/her good compensation package. In today’s world, organization needs to develop compensation package which is aligned with organizations goals and strategies. According to the Wilson in his book “innovative reward systems for the changing workplace” (2003), organization needs to develop and implement strategic reward framework. Total reward system should contain formal and informal, short and long term, monetary and non monetary rewards. It should reflect most important requirements of organization that what organization needs to do to achieve its objectives. Organization needs to prioritize its needs so that it can achieve its objectives by providing appropriate rewards to its employees. The process of developing strategic reward system is shown in figure 1: Figure 1 If you follow these steps successfully then you can have motivated employees which will help to achieve organizations goals and objectives. This approach helps organization to achieve competitive advantage and enables organization to implement its strategic plan to realize its objectives and goals. In today’s competitive environment, organizations need to add unique and distinctive rewards and benefits so that best employees can be retained and turnover rate can be minimized. Reward is a useful tool to influence the behaviour of employees and it is a best strategy to create conditions which make them work according to the requirements of organization. There are four main forces which drive the human behaviour; focus, feedback, competencies and consequences. Focus tells what an individual should do to support organization process. Feedback is required by management to tell the employees whether they are performing according to the requirements or not. Competencies are abilities, capabilities and talents which employees need to do a specific job. Consequences are important because employees do work just to get positive consequences and effective consequences help to achieve desired outcome from employees. You need to link rewards with performance and actions so that employee work hard to achieve rewards and in doing so it helps organization to accomplish its objectives. We can also look in the literature of Worldatwork that total rewards system includes everything which is valuable for employees. Worldatwork organization says that monetary and non monetary rewards which are given to employees in return to their skills, times, efforts and talents. According to the organization, there are five key elements which are needed in total reward system to attract, motivate and retain capable employees. The key 5 elements of rewards are as follows: * Compensation * Benefits * Work-life * Performance and recognition * Development and career opportunities Transactional (tangible) Organization needs to combine these elements into fair compensation package which increase the motivational level of employees. Employees should perceive that compensation package is good enough for their services. Organization has devised a model of total rewards which can be seen in figure 2: Figure 2 Relational (Intangible) Individual Communal Armstrong and Murlis (1998) used the term reward management and they emphasized to use dynamic approach to make reward system in a flexible and innovative way. You need to manage rewards strategy in such a way that develops appropriate organizational culture and core values which motivates employees to work hard to increase shareholders’ wealth. It can be seen in literature that basic salary without other benefits has no space in the market because of the emergence of total reward system. It is essential for organizations to add a range of benefits and rewards to attract, retain and motivate employees to achieve value added and competitive advantage for their firms. Critical analysis: Compensation packages are developed by firm to achieve following benefits: * Improve staff retention rates * Competent staff recruitment * Maintain the motivational level of employees * Attract new employees * Increase loyalty of employees Theory suggests that reward package should contain both monetary and non monetary benefits to realize the required output from employees. It can be seen practically that all organizations are changing their reward systems to make it better and unique according to the requirements of human resources. 1: Asda is one of the biggest retailers in UK market which is also offering a competitive remuneration package because it believes that its employees make unique and valued contribution towards achieving its objectives. It has developed a world class remuneration package to give reward to its employees’ efforts and skills. This package includes staff discount, performance related bonus, flexible working hours, pension, and share save plan and night manager allowance. Asda has given opportunity to its employees to perform in TV advertisements. 2: Tesco is another one of the biggest retailer in UK which is continuously rewarding the loyalty of its employees by offering 10% discount. It values its employee by securing the future of its employees using pension plan. Other various discounts are provided to employees for their leisure hours such as theme parks, holidays and gym membership discounts. Every organization is striving to get good compensation package like 3: HSBC is providing a range of employee benefits and competitive rewards, including health insurance, life insurance, retirement and savings programs. It also provides programs that help employees to manage their careers. Health care benefits include medical, dental and vision plans for employees and their families. Work/life balance includes adoption assistance, child care centres, health and wealth plans, time off program and company paid holidays. For financial security, HSBC is providing sharesave, retirement and saving programs for employees. 4: Barclays is also providing a range of benefits and rewards which includes performance based incentives, private healthcare and flexible working. They are also providing tax-free sharesave and sharepurchase schemes, childcare programs and other discounts to employees. 5: Marks and Spencer has developed benefits package to attract, retain and motivate its talented people in retail. Marks and Spencer is offering following benefits to employees: * Competitive pay and performance based rewards * 20% Employee discount * Pension and retirement plan * Bonus Scheme * Discounts for Holidays booking, health club memberships 6: Mcdonalds has designed benefits program for its employees which include health and protection benefits, rewards and recognition program like company car program, financial management services which include profit sharing and saving plan, Mcdirect shares. For crew members, it provides flexible schedules, paid training and discounts on Mcdonald’s food, scholarship programs, extracurricular crew activities, and service and recognition awards. As we have seen that theory suggests that transactional and relational rewards should be included in the total reward system to motivate them to achieve organizational objectives. Relational rewards include non financial rewards which come from work environment like opportunities to use and develop skills and career opportunities. We have seen that almost every organization who wants to reach at top is investing to develop competitive benefit plan. We can also see the application of Maslow theory in each and every good organization as they are providing programs to fulfil needs of every level. Providing competitive salary to fulfil psychological needs, safe working conditions to accomplish safety needs, provides discounts for gym membership and holidays booking for accomplishing social needs, praising efforts of employees to fulfil self esteem needs, allocating challenging tasks to recognize individual abilities. There are many retail firms which are offering exceptional rewards and pay because their employees work hard to create ultimate retail experience for their customers. 7: Harrods is one of those organizations which is providing highly competitive commission based salary and it also provides rewards card which allows discounts for employees, 50% dress allowance is given to employees, pension and health plan, discount brochures to get discounts from other businesses, holiday allowance and season ticket loan. 8: Pizza hut which is one of the leading pizza brands in the world has developed strong rewarding system where management acknowledge achievements of their employees. It has created three reward systems for managers, team members and head office separately. It is also provide career plans through which team members can develop themselves to reach to the top level. It is important to provide rewards and benefits to retain best employees and there are many ways to reward employees so that their morale can be strengthened. First of all you can live the culture of organization to get rewards like 9: yours truly restaurants which is situated in chagrin falls, Ohio has given rewards to its employees as they are following the culture of organization. Every year an employee is selected who embraces the mission of organization to make people happy and become number one and that employee is given a scholarship. Secondly, find employees who can support corporate values and vision and retain them by providing good compensation package. Thirdly, you can provide compensation packages which are based on performance of employees like 10: Agilysys is rewarding its employees by providing opportunities to become eligible to get particular reward. Employees want to work in the environment which is friendly and creative if they are not happy at their work place then their productivity will be very low. Great organizations provide challenging, pleasant and motivating environment so that employees’ productivity can be enhanced. Many organizations have made fun committees for informal get together so that employees can enjoy with each other. It helps to fulfil social interaction needs of an individual. 11: Breaverbrook was selected as one of the 100 best companies because it got highest scores in all areas of employee management. Its employees are very happy and gives 90% score to the organization because it provides development and career path for its employees. It gives benefits 25 days holiday annually, a return to work bonus for new mums, dental insurance and life assurance. 12: Admiral Group also won award of best employer as managers appreciate their employees when they perform well. Managers help employees to give best output every day. Firm got second highest score 82% for having good managers who trying to fulfil needs of employees. It provides jolly environment and friendly management for employees to enjoy their working culture. Another organization is 13: Microsoft; employees of Microsoft are satisfied with the organization because they are provided with regular training. The experience they gain from the job is valuable for their futures. Company is spending £1500 on employees’ development and it provides 95 hours of formal training. A mentoring programme is provided so that employees can learn new skills from each other. Companies are working to provide compensation packages for employees’ satisfaction. Remuneration package should contain direct rewards as well as indirect rewards. Theory and practice suggests that an element of motivation should be active so that outcomes from employees can be achieved successfully. Then, you need to give incentives to employees so that you can retain best employees. 14: Kellogg is also providing competitive benefits which have increased the employees’ satisfaction level. They love to work for Kellogg because it takes care of health during job. It was selected as one of the 100 best companies and it was ranked 11th in providing pay and benefits to its employees. Every employee is provided with developmental plan and the experience they gain from their jobs is valuable for their future. Employees do not want to leave the job because outstanding performance is recognized with variety of rewards which includes cash prize, theatre tickets, and dinner for couple and holidays, discount vouchers are also given to employees. 15: Mandarin Oriental Hyde Park Hotel gives VIP treatment to its employees when they give extra ordinary service to its customers. Staff who perform well is provided with champagne and a certificate of good performance. They are valued because they help organization to give excellent service its customers. 16: Peacock is also providing benefits and rewards for its employee commitment and efforts. As you become team member, you get 20% discount on all items. After that you get another 20% discount then you can enjoy up to 40% discount. There are many other benefits which are given according to the role of employees. They are as follows: * 30 days holiday * Healthcare programs * Bonus schemes * Childcare vouchers * Relocation package * Long service awards * Pension plan 17: John Lewis partnership is a market leader in providing rewards to its employees. It has adopted policy to provide compensation according to the market requirements. It includes a range of market leading benefits which include pension scheme, paid holidays, extended leave, dining facilities and leisure facilities. 18: Bank of England has designed its reward package to attract talented staff and its package is consisted of three elements; competitive salary, core benefits and a flexible benefits. Core benefits include pension plan, private medical insurance, annual 25 days leave, and interest free season ticket loan and life assurance cover. Flexible benefits consist of wellbeing benefits, lifestyle benefits and leisure benefits. 19: Adecco is very much concerned about its people. It gives them opportunity to develop their skills so that they can discover your abilities. Employees can also select their benefits from its flexible benefits programme o fulfil their needs. 20: Santander is providing comprehensive reward package for its employees that include competitive salary, bonus and a wide range of employee benefits. It includes a minimum 25 days paid holidays, access to company pension and life cover arrangements, sharesave and partnership share arrangements, discounts on health and lifestyle products, access to company car arrangement and special discount on financial products. The reward system is given to employee according to the role of employee in the organization. 21: Primark is providing benefits which include training programs, opportunities for promotion, pension plan and childcare voucher plan. It is also giving health insurance scheme and allows 23 days holidays with flexible schedules. 22: Nestle has adopted following reward policies which include performance based benefits, competitive reward plan, inclusive reward system for all employees, flexible rewards to satisfy employees particular needs and requirements. 23: Shell is a global firm which is providing benefits according to the priorities of employees. Flexible working hours, sports and social activities are provided to employees. It is conducting regular surveys from employees to check their needs and problems.   24: JD sports is also providing rewards and benefits to its employees but it is unable to retain its employees as I have seen personally that many competent employees have left the firm and has joined its competitor firm 25: foot locker because it is providing basic salary with commission and it is giving discounts up to 30% to its employees even on sales. 26: Honda has developed its total rewards and benefits system which include paid holidays, flexible working hours, lease programs to purchase products, educational development program, vehicle safety training program and credit union membership. 27: Apple is providing benefits package which include health and life insurance plan, flexible spending accounts, short and long term disability coverage, long term care insurance, financial education seminars, product discounts, wellness programs and personal and family counselling programs. 28: British airways offers highly attractive rewards packages which include travel discounts, generous holiday entitlement, profit share scheme, bonus, superb sports and social activities and subsidised staff restaurants. 29: Nike is also providing a number of employee benefits to retain skilful workforce. It includes healthcare facilities, scholarships for employees children, employee assistance program, work/life balance resources and referrals, adoption and tuition assistance programs. Conclusion: It can be concluded that organizations need to add benefits in their reward system as benefits are as important as good salary but salary without benefits cannot help organization to attract skilful and competent employees. If employees are not happy with the company then their motivational level will be very low and their productivity will also be very low. Organizations are adding unique and matchless benefits in their total reward system so that they can compete in the competitive marketplace. This will help to attract, motivate and retain best employees. If employees are happy with the organization then they try to achieve organizational objectives because organizations give fair treatment to their employees. They are treated as part of the organization which also increase the morale and loyalty of employees. If organizations are providing opportunities for career development then employees love to be the part of that organization. It is much better for organizations to add more benefits to reward system because increasing direct compensation is expensive for organizations and it does not have potential to fulfil all needs of employees. Organizations are working to polish the skills of their employee by providing regular training and developmental plans. As their employees are well trained better results can be achieved and firm can achieve its goals and objectives successfully. If employee undervalues the cost of benefits then it is risky for organization because organization alone cannot achieve its objectives. Human resource is one of the key resources without which organization cannot exist. It complete its processes with the help of human force. References: 1. 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